How To Make Money From Rising Bond Yields

People often ask me, “When will the bear market in bonds be over?” As if I knew. The honest answer is, not until the economic figures verify a slow-down is in process. The numbers you need to monitor besides CPI and PPI are new housing starts, existing home sales, new automobile sales and used car sales. Oh, and it’s not a bad idea to keep an eye on retail sales.

Since we’re a country where 70% of GDP is from consumer spending, that’s your litmus test too. We think consumer spending will come to a screeching halt sometime this year. The bond market continues its price descent with higher mortgage and interest rates, excruciatingly high energy prices and overall inflation leading the way.

So what should an investor do? The answer is simple. Take nibbles at individual bonds between now and when the designated numbers begin to crater. Once they begin to fall, it’s too late. We will have reached the peak in yields. There’s so much speculation in Bondland about how many rate hikes the Fed will heap upon us. We don’t know. And certainly the gurus don’t know. The accelerated fall of bond prices has been faster than the Fed’s two paltry moves can keep up with.

Munis

Municipal bond yields in many states have more than tripled in the 7-10 year maturities. To insert some context, last year at this time ten-year AAA rated General Obligation bonds yielded 0.976%. Today that yield has soared to over 3.00%. Will yields go higher? I hope so. Continue taking small to medium size nibbles at individual municipal and corporate bonds. And for goodness sake don’t convert paper losses into realized losses by selling the bonds you now own. That is, unless you have offsetting gains. Then it becomes an informed tax-advantaged strategy rather than a panic get-out-at-any-cost sale.

Today’s increased yields drastically improve your reinvestment rate if you aren’t living on the income. In bond funds, open end, closed end or ETFs, you don’t have many choices. The massive outflows from bond funds causes forced selling by the funds to meet redemptions. Sure, our individual municipal and corporate bonds have lost value. But if you hold to maturity you’ll get par value—no such thing with bond funds. They are perpetually invested.

So that’s the problem and here are some yieldy bond solutions. In the municipal bond space if you are self-managing, look for insured kicker bonds. Those are bonds with pretty short calls and short to intermediate final maturities.

One such idea is Oak Island North Carolina Enterprise System Revenue bonds (CUSIP: 67140PCT9), insured by Assured Guarantee. The financials are consistently sound, revenues exceed expenses and they have sufficient cash reserves. These bonds finance essential services—water system and waste water—5% due June 1, 2027 and callable June 1, 2025. Yield to the 2025 call is 2.65% and yield to maturity kicks up to 3.51%.

If your hair is on fire because inflation is at 8.3%, even dividend paying stocks aren’t keeping pace. Plus, the taxable equivalent yield in a 40% tax bracket sports a 5.85% to maturity and 4.408% to the 2025 call—both below current inflation rates. If you worry that inflation may stay elevated for several years, then invest in seven year or shorter bond maturities.

The municipal bond trading platform you are probably now using has hundreds of offerings. Just be certain the bonds you consider trade within context of the last few trades. In these illiquid markets, bond brokers and dealers are playing king of the trough, marking bonds up to outrageous levels.

Corporates

Corporate bond yields have come to life. Now taking nibbles in this market is worthwhile. Bonds we hold and would add on to are household names with good balance sheets and are in differing industry groups.

Marvel Technology 4.20% due 6/22/23

CUSIP: 573874AL8, 3.21% YTC of 5/22/23, 3.28% YTM

Kinder Morgan
KMI
4.25% due 9/1/24

CUSIP: 494550BV7, 3.86% YTC of 6/1/24, 3.90% YTM

Dollar Tree
DLTR
4.00% due 5/15/25

CUSIP: 256746AG3, 3.65% YTC of 3/15/25, 3.66% YTM

Hyatt Hotels
H
4.85% due 3/15/26

CUSIP: 44857AF9, 4.70% YTC to 12/15/25, 4.75%YTM

FedEx
FDX
3.40% due 2/15/28

CUSIP: 31428XBP0, 4.04% YTM

Don’t be fearful nibbling on some bonds. This is what we’ve been waiting for—higher yields. They are here and most likely will go higher.

No guru will correctly call the top in yields. Measured moves of buying a little now, a little later, and some more much later is a common sense approach.

Bear markets are ugly, but also present advantages. There’s an old Wall Street adage: “When they’re yellin’, you should be sellin’ When they’re cryin’, you should be buyin’.”

The tears are now flowing.