Munis close out 2023 in the Black

“2023 is not over Yet”

~Bill Watkinson October 2023

Year in Review

· While CEO Bill Watkinson enjoys quoting that MuniBonds have never had consecutive negative calendar years since the early 1980s, by mid-October 2023, things were not looking so good.

· Beginning in August 2023, I began to gently and by October 2023 proceeded to emphatically tell Bill that maybe quoting this “never had consecutive negative calendar years” stat to investors was not a good idea because:

1. 2023 was in the red for MuniBonds through October 31, 2023

2. This stat goes back to the early 1980s which was the beginning of the 40 year secular bond bull market… perhaps a longer data set is necessary.

Bill’s response: “2023 is not over yet.”

· Shortly after Bill’s response in October, the MuniBond market rallied.

· After the municipal bond market posted a record monthly rally of over 5% in November 2023, the Bloomberg Municipal Bond Index followed up with a 2.32% gain in the month of December which was the 3rd best December return since 1980.

· MuniBonds, evidenced by the Bloomberg Municipal Bond Index, ended the year with a gain of 6.4% outperforming US Treasuries by 235 bps or 2.35%

· Every state and territorial bond experienced a positive December and 2023.


High Expectations for Rate Cuts Sets the Stage for 2024

· There is a strong market sentiment and expectation that the Federal Reserve will cut interest rates throughout the year. There is an implied likelihood expectation of over 85% for five rate cuts in 2024 but expectations do not equal policy implementation.

· Some of these expected 2024 rate cuts have been priced into the bond market already as the short-term Treasury rates fell over 50bps in December 2023.

“Timing the MuniBond Market is not our Game”

· While we monitor, study and respect the Federal Reserve, we continue to refuse to predict future interest rate moves. We continue to adhere to our “Buy at Wholesale” level mandate. For example, in December 2023, on the BondNav InspereX platform, we entered bids on over 60 different MuniBonds for sale.

· We entered over 60 bids at wholesale prices but only 6 of our bids were successful.

· Many of those bids were (Highest Bid – DNT) or did not trade. The seller refused to hit our bid. It would have been a lot easier, quicker and lazier to merely lift offers of quality MuniBonds at significantly less yield, but doing that would be a disservice to the client and to ourselves. In other words, over 90% of sellers refused to hit our aggressive bids at a 4-5% yield level.

· From November 1st to December 29th, the AAA MuniBond yield scale declined 130 bps. 

· Even while the AAA scale declined 130bps over the November and December Rally (remember yields go down when prices are bid up), we were successfully bidding on MuniBonds with yields over 4-5%... buying bonds with up to 150bps of additional yield net of our management fee.

Summing Up

· Between August and October 2023 in my newsletters and on LinkedIn, I did not want to sound like a demagogue or an info commercial spokesman when MuniBonds were reeling and yields were spiking to the highest levels in 15 years, but maybe I should have.

· We had two clients who were frightened and wanted to liquidate during the October 2023 lows and we strongly argued that liquidating was the “wrong move at the wrong time.” One client sold at the October lows and locked in his paper loss by wanting money market instead. The other client benefitted from listening to us, not selling and thus enjoying the Nov-Dec Rally. I can not make this up.

· Despite the November and December rally, we continued to lock in “well above average yields” for our clients due to our labor intensive “Buy Wholesale” mandate. There is more yield out there in MuniLand if you put your capital with Watkinson Capital.

· For our clients, thank you for your trust in us in managing the “Stay Rich” portion of your capital. We enjoy the “thrill of the hunt” of securing more net yield through our methodology. In addition, we appreciate the challenge of navigating the 50 different states, the 50 different markets plus territories, learning about different credits & structures, and adapting to new technological advances in MuniLand.

· Finally, we enjoy answering your questions, putting you at ease, and telling the proverbial “story” behind the MuniBond in your portfolio.

· Please contact me with comments, questions, and constructive criticism.

The Outcome will be more Income.


W. Jeffrey Watkinson


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