Do you know how the bond market performed yesterday? Or last week? Or last quarter?
Do you care? Probably not.
“Short-term Performance” isn’t in the lexicon of successful municipal bond investors. They’re delighted by generating tax-free income year after year, followed by return of principal. Interest rate prognostications and day-to-day market valuations are meaningless to them.
Yet, from the media’s perspective, that leaves little to write about – unless they change the narrative. So instead of covering a dependable but boring market whose short-term performance is irrelevant, why not cover it as a horse race?
The guessing game
Take, for example, a recent piece by Bloomberg, where the giveaway is in the headline: “Being Wrong on Long Bonds Cost Buyers Up to 30% This Year.”
Investors, the story explains, rotated into short-term debt last year over fears of an imminent spike in interest rates, a strategy that seems to be backfiring today as long-term bonds take off.
Zero-coupon Treasuries, for example, are up more than 17% so far in 2014 after dropping almost 22% last year. Similarly, Pimco’s 25+ Year Zero Coupon U.S. Treasury index ETF, which lost 20.9% last year, is up 17.2% this year.
To help construct a full-blown phenomenon from these recent market movements, the author turned to Bank of America analysts, who last year predicted a “great rotation” out of stocks into bonds (which, incidentally, never happened). They termed these latest events a “rotation back into duration.”
Now there’s a story!
It is true, of course, that long-term bonds have been appreciating this year and the muni market overall has been stellar. As another story declares: “Muni Bonds Shower Investors With Biggest April Gains Since 2011.”
In April alone, according to the piece in Businessweek, munis have earned 1.24%, the biggest gain since 2011, with the first quarter of 2014 thundering to its strongest start in four years. Even so, munis remain an outstanding value.
“For an individual investor, it makes all the sense in the world to still own municipals, even though a lot of that cheapness came out,” according to an asset manager quoted in the story.
True but not relevant
All very interesting, and while the facts in these stories are correct, the implication that investors need to get in or out at a specific time is patently false and unrelated to real-world success.
Individual muni investors don’t follow the twists and turns of the market as they would equities. They view gyrations, which are often driven by analysts trying to read the Fed or the ever-evolving guesses of TV talking heads, as irrelevant. They know they can’t predict interest rates any better than the “great rotators” can.
They understand that the fundamental goal of munis – to generate a reliable stream of tax-exempt income – is simple to achieve. Timing never makes sense.
While we, too, celebrate the muni market’s success this year, it’s not germane to the objectives of investors in individual bonds, and a strategy based on accurately guessing the direction of interest rates is doomed to fail. The greatest value in munis has always been found in long bonds and holding them for their substantial reinvestable income, even as others react to the latest headlines and conjectures.
How do the truly wise know when to invest? That’s easy: When they have investable dollars available.