Exuberant Optimism

The financial markets continue to reflect a high level of optimism. Stocks had good performance in 2025 and developments in artificial intelligence is on fire. There is so much optimism in financial markets that it even bleeds into the bond markets.

Many investors seem to be content with their portfolio and very few seem to be making, or willing to make, a meaningful change in their portfolio mix. The one message that seems to resonate with me is this: stay the course.

This is the message that a lack of pain delivers. Bumps in the road have been merely that; bumps in the road. The last umpteen years have been a financial planner’s dream. As a result, many long-term financial plans remain on track. However, it is important to review portfolio components individually rather than relying solely on overall results.

This is not what bond performance figures tell us. When examined independently, bond performance has been more modest compared to stocks. Looking at the municipal bond market, the Bloomberg Municipal Bond Index reports the following compounded returns: 4.25% for one year, 2.63% for two years, 3.87% for three years, 0.80% for five years, and 2.34% for ten years. Index performance does not reflect the deduction of fees, expenses, or taxes, and investors cannot invest directly in an index. Actual investor results may vary, particularly in separately managed accounts (SMAs) or mutual funds where expenses apply.

At 0.80% per year for the past five years, some investors may reasonably be asking the question: “Why Bonds?” It does not matter whether you are 80/20, 70/30 or 50/50 in your mix of stocks and bonds. That said, bonds are typically included in portfolios to help manage risk, provide income, and reduce volatility.

Perhaps it is the exuberant optimism. Recent municipal bond returns of approximately 4% over the past three years and just over 4% last year, maybe bonds are on a roll and again we should stay the course.

Unfortunately, bonds do not look worthwhile from my perspective. Stocks are trending up; we all know this. Bonds however are not, and few understand how bonds work (perform). Bonds are trending down and that is why their performance is lacking.

Owners of long-term bonds are making the bet (or accepting the risk) that long-term interest rates do not rise dramatically. When optimism runs high, the last thing investors think about is the risks they are taking. Risks? What risks?

Individual investors hold a significant portion of the municipal bond market, about $3 trillion of the $4 trillion total market. We have discussed this over the past year in this letter along with how investors in the municipal bond market “own the market.” This helps explain why you can compare the Bloomberg performance numbers above with almost every other fund or portfolio and you will see similar figures.

“Owning the market” for municipal bonds means you own a healthy percentage of long-term bonds. As we have discussed last month in this letter, if the ten-year U.S. Treasury note yield “hung in,” 2025 performance figures will as well. Hence 4%+!

If the ten-year note trades lower in price and higher in yield, performance figures will drop. This is the trend for long-term bonds and the reason we do not buy or “own the market” in municipal bonds. The risks are too high and why should we accept risks when we are able to avoid them?

I completely agree with the stay the course message. Here at The Select ApproachTM we are certainly following our process, and we continue to focus on finding worthwhile bonds for our clients.

The portfolios of The Select ApproachTM do not need to be sold. This is not the case for most exuberantly optimistic investors. Stocks have already outpaced bonds for about six years now and as I have said I do not expect down trending long-term bonds to save the day any time soon.

Board of Regents Of The University Of Texas System

Revenue Financing System Bonds

Series 2026A

Aaa Underlying Moody’s AAA Underlying S&P

Due 8/15   Dated 2/1/26 Maturity 8/15/44

$968,585,000 Sold

Years   Maturity       Coupon        Yield*

1         2027             5.00%           2.33%

2         2028             5.00%           2.34%

3         2029             5.00%           2.35%

4         2030             5.00%           2.39%

5         2031             5.00%           2.44%

6         2032             5.00%           2.55%

7         2033             5.00%          2.61%

8         2034             5.00%          2.71%

9         2035             5.00%          2.81%

10       2036             5.00%          2.92%

11       2037**          5.00%          3.06%

12       2038**          5.00%          3.21%

13       2039**          5.00%          3.34%

14       2040**          5.00%          3.41%

15       2041**          5.00%          3.55%

16       2042**          5.00%          3.68%

17       2043**          5.00%          3.80%

18       2044**          4.00%          4.14%

*Yield to Worst (Call or Maturity) **Callable 2/15/36

Source: Bloomberg

This is an example of a new issue priced the week of 1/5/26.

This commentary is for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any security. Past performance is not indicative of future results. All investments involve risk, including the possible loss of principal. Prices, yields and availability subject to change. Investment return and principal value of fixed income securities may fluctuate, and bond prices are subject to interest rate risk, credit risk, and liquidity risk. Index data is provided for illustrative purposes only.