Leading up to Penn State-Michigan November 11th
Football game with rumors about sanctioning Coach Harbaugh and all the pre-game
noise, Michigan QB J.J. McCarthy was quoted as saying:
“Just keep reiterating the mantras that we’ve set for
ourselves, every single day, stay in the moment and focus on what we can control,”
McCarthy said. “And not worry about all the outside noise or anything that’s
going to get in the way of us achieving our end goal, which is winning a
national championship.
“Bonds vs Bond Funds: how the Higher Rates are Changing the Calculation.”
https://www.wsj.com/finance/investing/bonds-vs-bond-funds-how-higher-rates-are-changing-the-calculation-2dbaf8be?reflink=integratedwebview_share
The WSJ posted this article on November 11th examining pros
and cons of bond funds vs. owning individual MuniBonds. I cannot share this
article on the newsletter due to copyright issues. Email me if you want a recap...
The argument in this article
reminded of Michigan’s QB J.J. McCarthy’s quote before the Penn State game on
November 11th 2023. Focus on what you can control, do not worry
about what you cannot control, and block out the noise.
I wish the author was more forceful with her argument under the
"Protecting Your Capital" header. With Bond Funds, the investor loses
control of a bond maturing since funds have infinite maturity (unless the fund
is shut down). Buying an individual bond is like watching your favorite movie
because you know how the story ends. The investor knows when and how much bond
interest is to be received and when the investor's capital is returned at a
stated maturity.
Secondly, the investor loses further control of their capital with a bond fund. Most bonds, bond funds including MuniBonds are
down or negative since the Fed raised rates 11 times since March 2022. Today it
is a paper loss, but the paper loss becomes a real loss if the investor sells
the individual bond before maturity at par/call date.
When an investor invests capital
in a bond fund with thousands of other investors, the investor's capital is at
risk of permanent NAV loss due to the buying/selling actions of other
investors. Remember March 2020 with the onset of the pandemic and first 2-week
work from home mandate? It is estimated that there were $45 Billion of MuniBond
Bond Funds outflows in one month alone. March 2020 selling reversed 60
consecutive weeks of inflows from late 2018 through early March 2020.
If you want to do a deep dive on March 2020 in MuniLand, I recommend
reading the following 2020 year in review posted by the Municipal Securities
Rulemaking Board. (MSRB) https://www.msrb.org/sites/default/files/MSRB-2020-Municipal-Bond-Market-in-Review.pdf
If you can afford to keep control of your capital through individual
municipal bonds with finite maturity, why would you consider giving up that
control?
PS: Going the TBill and Chill route
also means losing control of the yield of your bond investment. You keep control of the principal but not the reinvestment yield. In 6 months or 12 months,
interest rates could be a lot lower or higher than the date purchased.
Best,
W. Jeffrey
Watkinson
jeff@watkinsoncap.com
#MuniBonds #municipalbonds #Munis
#WatkinsonMuniBonds #GetRealStayRich #MunicipalBondSMA #Bonds #FixedIncome
#MuniBond #WatkinsonMunicipalBonds #TBillnChill #TBillsnChill #TreasuryBill #TBillandChill
#TBill&Chill