Dear Shareholder:
Long Term Treasury Bonds:As I write this letter, the outlook for U.S. Treasury bonds is somewhat mixed. The Federal Funds rate was raised to 4.75% (from 4.50%) earlier this month and a growing number of traders are predicting that this increase may be followed by another 25 basis point hike. The market for Treasuries has been moderately down in price since the first of the year, reflecting this outlook.
In a recent speech to the Economic Club of New York Federal Reserve Chairman Ben Bernanke cited four possible reasons long term Treasury prices have not declined more (i.e., yields have stayed stubbornly low). First, is the market’s apparent satisfaction that inflation has been restrained and will continue to be in the near term. Second, increased purchases of Treasuries by foreign governments may be putting downward pressure on yields. Third, managers of pension funds are being encouraged to buy longer maturities of bonds to match their long term pension liabilities. And fourth, as investors have sought longer term securities supply has not kept up with the demand. You can take solace that even the Chairman of the Federal Reserve is not absolutely sure what is going on in the bond market!
Municipal Bonds: Conventional wisdom would suggest that municipal bond prices would be down along with Treasury bonds. However, this hasn’t been the case. The share prices of our eight municipal bond funds are down only slightly from their January 1st price. The share prices of our funds have been unusually stable during this period of relative instability for Treasuries. Why? This seems to be the $64,000 question.
One reason is new supply of municipal bonds has been sparse (new issue volume is down roughly 25% year over year). Another reason is that municipal bonds have become attractive compared to Treasury bonds when you take into account their federal and state tax exemption. This point was recently made in a Wall Street Journal article published on March 22, 2006 which carried the title “Investing in Your Local Aqueduct: The Growing Appeal of Municipal Bonds” and I quote it in part:
“At a time when there is little difference in yield between short- and long-term Treasurys, which is known as a flat yield curve, and Treasury prices are falling amid rising interest rates, munis [municipal bonds] look particularly attractive. The reasons are twofold: first, munis are exempt from federal taxes, as well as state and local taxes if you buy bonds issued in your home state. That means the effective yield you earn often tops the comparable Treasury and corporate bonds you’ll find; second, foreign investors are largely no-shows in the municipal bond market, and the lower demand has meant municipal bond yields haven’t compressed to the degree seen in other fixed-income markets.
The upshot: ‘There is a real encouragement to be in munis at the moment,’ says Jim Cusser, bond manager at Waddell & Reed. ‘And if you’re in the higher tax brackets, it’s a lay-up – munis are much more attractive than taxable bonds.’”
We also think that municipal bonds offer compelling value in the current market environment. Having said that, always remember that a diversified investment portfolio is a wise strategy. We are extending maturities in our Short-to-Medium term portfolios and trading out of advance refunded bonds in our longer portfolios. This is in line with our belief that long term municipal bond rates will not go significantly higher even if they should move up a little from present levels.
Accessing Your Account on the Internet: We have a few shareholders who occasionally ask for the ability to access their accounts through the internet. We have investigated the feasibility of offering internet access to accounts but have concluded, for a number of reasons, that we are simply unable to provide this kind of account access. We must maintain an impenetrable firewall between our accounting computer functions and the outside world. Worms, viruses and computer hackers could potentially destroy the integrity and security of our computer system. In our opinion, this is a risk that should not be taken.
It is true that we could have a completely separate system into which we dump data daily, but nothing more than information could retrieved from that arrangement and the expense to the fund would be massive. We are committed to keeping our fund expenses as low as possible. Given the substantial expenses associated with adding internet access to accounts, it simply doesn’t seem to us to be a wise use of shareholder resources to offer this feature at this time.
About Redistributing Assets: Thinking about the possibility of modern day computer hackers trying to redistribute wealth calls to mind a story my wife tells about an individual in her hometown of Corinth, Mississippi.
The town character was a man named Carlisle; intelligent but spacey; sort of an idiot savant. Carlisle would come to town almost every day and visit for awhile in certain favorite haunts, one of which was the bank. One day, while he was in the bank he accosted Mr. Robbins, the bank President and said; “Mr. Robbins, I think a fair thing to do would be to transfer all the rich folk’s money in your bank to all the poor folks in town.” Mr. Robbins thought a minute and replied, “Carlisle, in about a month’s time all the same rich folks would end up with that money right back in their accounts.”
“No sir, Mr. Robbins”, Carlisle retorted. “I mean, do it every Saturday!”
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