Your Reality Is Unique To You

On August 6th I published my letter Bond Bear Market Enters Next Phase. That letter was a follow up to my July 16th letter Treasury Prices Weaken, Municipals Yawn as we saw US Treasury bond performance lead the way lower. Yawn no more. The end of the third quarter has bond performance, across all sectors, showing losses at a historically significant pace, once thought to be reserved for the stock market.

Foreseeable? Why, yes. Unprecedented? No, this is what happens in bond bear markets. Our favorite bellwether US Treasury bond, the 1.25% of May 15, 2050, hit at a new low of 42.2 on October 1st. Yes, that is 42.2 cents on the dollar for a $73 billion bond maturity that sold at a 98.0343 discount new in May 2020 and an all-time high of just over 102 on August 7, 2020. This is what happens to long-term bonds when interest rates rise from less than 1.25% to 5.75% over a six-year period.

There need not be any sellers of this bellwether US Treasury bond for the price to fall so dramatically. Values can simply evaporate, as a fall from 102 to 42 can attest, as the market for long term treasury yields has sharply risen. But since these are US Treasury bonds, and the universe of US Treasury securities is only 1,251 CUSIPs, with approximately $33 trillion in face value, trades may have occurred regularly in the outstanding US Treasury securities throughout the downward trend.

Such cannot be said for municipal bonds. While trades of municipal bonds may figure into their pricing, municipal bonds are generally priced based on their coupon, maturity and call features (if any) with the assumption that the bonds did not trade (or need to trade) to determine a market price. Compared to US Treasury securities, outstanding municipal bonds number hundreds of thousands (over one million CUSIPs in Bloomberg’s database), and may not trade frequently enough to reflect changes in market yields through actual transactions. Market prices can (and do) simply evaporate based on valuation assumptions.

The lesson here, of course, should be to not own bonds where prices would fall if the trend to lower prices (higher yields) is the trend. Yet owning tax-free, as well as taxable, municipal bonds can be quite worthwhile, provided you select worthwhile bonds, especially when the market is entering the next phase of the bond bear market.

The market for bonds, in general, does not provide for such safety from price declines as we have seen bond market losses in US Treasuries, corporate bonds, municipal bonds, as well as mortgage bonds. In other words, bond market performance offers investors no simple place to hide. Long time readers and clients know this because bonds are managed in scale. If a manager performs well with $100 million in a bond portfolio, then here is a billion dollars for you to manage…until there is billions more to manage and so on. Bond portfolios generally can look like everyone else’s bond portfolio and hence everyone’s performance can begin to look alike.

Performance is tough to come by in a bond bear market. If it was easy, everyone would be doing it. But look around at whatever bond mutual fund, bond package, bond exchange traded fund, etc. you can find and you will find that many have experienced losses during this period.

This is not your reality as your returns are unique to you and you can find them on your monthly statement cover page every month. We are working the plan we have had for years now with results of compounding positive returns, not betting, or hoping, or calling the bottom, or doubling down on a market that many people refuse to see as a downward trending market. Individual results vary, and past performance is not indicative of future results.

For months (years?) I have been talking about optimism in the bond market. Whether continuing to own bonds when inflation hit 9% back in June 2022, or yawning at deteriorating US Treasury bond prices, the market for spread bonds (corporates, municipals, and mortgages) remained tight, meaning the market prices on the spread bonds were relatively high compared to the US Treasury bonds. Such optimism, taken together with the fact that prices can, and do, fall without any or little true selling of the bonds and you have a market, especially in municipal bonds, that may have experienced little actual selling by bond investors.

If we can have the price performance losses of the past two quarters without much of the way of selling, just think where the market may be when the selling finally arrives. We do not need to know when, or whether, this will happen; we continue to work the plan and manage portfolios based on our investment process.

This message is for you, your friends, and your relatives: take a hard look at bond funds or other bond products that do not have a stated maturity. If the number one rule of investing is not to lose money, then you should understand what you own, how it is performing, and what risks you are taking to own it. The trend is only your friend if you heed it and follow it. Show your friends and relatives how you do it here. I look forward to working with them.

Spring Branch Independent School District, TX

Unlimited Tax School Building Bonds, Series 2026

Aaa Moody (Permanent School Fund Guarantee) Aa1 Underlying AAA S&P (PSF) AA- Underlying

Due 2/1 Dated 10/15/26 Maturity 2/1/50

$204,650,000 Sold

Years Maturity Coupon Yield*

1 2027 5.50% 3.51%

2 2028 5.50% 3.54%

3 2029 5.50% 3.63%

4 2030 5.50% 3.68%

5 2031 5.50% 3.75%

6 2032 5.50% 3.83%

7 2033 5.50% 3.88%

8 2034 5.50% 3.96%

9 2035 5.50% 4.01%

10 2036 5.50% 4.08%

11 2037** 5.25% 4.19%

12 2038** 5.25% 4.27%

13 2039** 5.25% 4.43%

14 2040** 5.25% 4.60%

15 2041** 5.25% 4.69%

16 2042** 5.25% 4.83%

17 2043** 5.25% 4.91%

18 2044** 5.25% 4.95%

19 2045** 5.25% 5.01%

20 2046** 5.25% 5.03%

21 2047** 5.25% 5.05%

24 2050** 5.125% 5.15%

*Yield to Worst (Call or Maturity) **Callable 2/1/36

Source: Bloomberg

This is an example of a new issue priced the week of 9/28/26. Provided for illustrative purposes only and is not a recommendation to buy or sell any specific investment.

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.