Heard Any Good Bond Jokes Lately?

Example of a bond ladder

Example of a bond ladder

“Ha, interest rates are a joke! You would have to be crazy to buy bonds today, rates can only go up from here,” said my client (we’ll call him Mr. Cash) in 1993 when I called him with a AAA rated 6% tax free bond.  At the time, his money market was earning 3-4%, if I recall correctly.  As far as I know, he is still mostly invested in cash and short term CDs to this day, waiting for rates to go up.

With money market rates at 0.01% currently, maybe his prediction is closer to reality today. Of course, those money market rates have been at essentially zero since 2008.  Who’s laughing now? Politicians, bankers, real estate speculators, or anyone else who PAYS interest. Certainly, no one who lives off interest thinks it’s very funny.

Mr. Cash was not terribly unique in his thinking for the generation that had experienced double digit inflation and interest rates of the late 70’s and early 80’s.  So is the nature of markets, things that seem so obvious and rationale, such as “rates can only go up from here,” frequently don’t work out the way that we expect.

At ATX, we think the market does a great job of pricing assets, whether that be stocks, bonds, commodities, real estate, or baseball cards for that matter.  What we can do is take the information the market is providing us and do our best to create a plan that works.

That’s why we use individual bonds due to their predictable maturity and cash flow.  If Mr. Cash had been willing to build a ladder of individual bonds back in 1993, with one rung of his ladder being that 6% bond, he would have earned roughly double what cash was paying at the time and more than cash earned at any time over the next 20 years.

Today, a AAA rated 10-Year municipal ladder could be built with a yield in the ballpark of 1.45%.  On the short end, the 1-Year is currently paying about 0.60% and on the long end the 10-Year is around 2.5%.  A year from today, the .60% bond will be reinvested in a 10-Year at whatever that yield is at the time.  We can’t predict what that will be, but over time the longer maturities typically have higher yields than cash.  In a few years you’re getting the yield on 10-year bonds but your money, on average, is committed for a much shorter time.

And don’t forget the real punch line, and that is bonds provide protection against one of the biggest risks we all face, our emotions.  Having enough of our capital securely tucked away in the relative calm of high quality bonds when the volatility storm that occasionally hits stocks is raging helps prevent emotional mistakes, like selling during a downturn.

Investing in bonds hedges us against bad investment decisions and gives us a better chance of having long-term success. 

That is no joke.

2/14/15 Rate Snapshot

US Treasuries0.43%0.85%1.18%1.60%2.05%NA
US Agency/GSE0.74%1.17%1.58%2.05%3.03%3.55%





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The yield table categorize bonds by Standard & Poor's (S&P) rating. Bonds which are not rated by S&P were excluded.  Single Premium Deferred Annuities are categorized by AM Best ratings.

For purposes of determining a municipal bond’s rating, the yield table uses the greater of the third party guarantor's or insurer's financial strength rating and underlying rating, where applicable. Consider the financial strength ratings of the third party guarantor or insurer as well as any published underlying rating of the issuer for a more complete assessment of the bond's credit risk profile.

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