Bear Market Reasserts Itself

Last month’s letter posited the correction in both stock and bond markets was over. The price action in February has indicated that to be the case.

Investors piled into both markets to begin the year; they have hope on their side. The bond market correction in two-year US treasury notes took it from 4.80% on November 4^th to 4.03% on January 19^th (all yields per Bloomberg). On February 24^th the note traded at 4.84%, a complete reversal of the correction.

The ten-year US treasury note traded at a multi-year high of 4.33% on October 21, 2022, beginning it correction. Three months later it was 3.32% on January 19^th when the correction ended, jumping to 3.98% on February 27^th. While not as a dramatic reversal as the two-year note, the ten-year note has traded at a higher yield levels in fifteen of the last seventeen trading days through February 27^th.

It is the municipal market however that has been shaken from the reversal. Last month I warned of the risk of a double whammy as municipals could see both higher yields and higher spreads. The stunning turnaround in treasury yields across all maturities has certainly occurred for a single whammy. Compare this month’s Waco, TX bond to last month’s San Angelo to see the yield move. We will see how spreads react once the municipal market sorts itself out.

Wednesday, February 15^th was the worst day for municipals since October (per Bloomberg). Underwriters of a $1.8 billion University of California needed to reprice the deal, which had been on the calendar for weeks, as much as twenty-four basis points higher! Not just a short-term maturity (the 2024s were repriced upward fifteen basis points) but across the board including a 24-basis point jump in the fifteen-year 2038 maturity. Such a reversal of municipal pricing may have happened before (I do remember 1987) but this was a huge reversal by any measure on a large deal to boot.

Stocks continue to shrug. While stocks have seen their 2023 gains erased as of February 24^th, prices remain much higher than when the correction began back in October. Stocks shot higher over a two-week period in October 2022, only to trade essentially sideways since.

This is the frustrating reality of trying to trade in a bear market. After suffering a horrible 2022 through the first three quarters, stocks reversed on a dime. Good luck with timing a move like that. Same thing for bonds. Both markets are in bear markets, meaning the direction of trend remains lower.

Will we continue to go straight down in price (up in yield) from here? Corrections are always tough to judge. How long and what shape will it take? Again, these are problematic for trading. This is not the environment we are used to in bull markets. Bear markets work differently.

The correction, in stocks, bonds indeed any market, over the past few months raised optimism to tremendous heights. Talk of a new bull market. Talk of the Federal Reserve lowering interest rates later this year. Talk of China returning to business. All asset classes seemingly were positioned to continue to do well. Except for the reality of the bear market.

Liquidity is drying up. The experience of the University of California earlier this month is one example. Bad, unexpected things happen to big players too. But one area that you may have a huge advantage is in mutual funds. Mutual funds, as well as other funds, like exchange traded funds (ETFs) offer you liquidity I believe is unparalleled.

Moving away from baskets of funds by pointing and clicking offers you, as an individual investor or money manager, liquidity that others may only dream of today. With weaker prices over the past several of weeks, investors may be hesitant to move. Dealers in municipals are looking for a bid that may or not be there…or does it lie much lower, like the effects of a 24 basis point higher yield (lower price). As a mutual fund holder, you get the advantage of current optimism, the advantage of point and click and taking advantage of liquidity that exists for you because this is what the fund promised.

Liquidity is but an illusion. In a bull market, the illusion of liquidity is unlimited. When the bear market fully reasserts itself, one might assume the opposite could occur. This is hard to fathom. But currently markets offer you, the individual investor and money manager, something others do not have. Exercise your advantage; sell your packages.

I continue to say now is not the time to own funds. Packages of bonds are designed for the bull market. Last year’s performance was a warning shot. We have also seen the correction come and go. This gives holders of funds the opportunity to point-and-click out before the single whammy becomes a double whammy.

We continue to find worthwhile bonds here at The Select Approach^TM. You know it works; tell your friends. The risks of other products have always been there. As the bear market continues to reassert itself, the time to move to calmer waters is now.

City of Waco, TX

Combination Tax and Revenue Certificates, Series 2023A

Aa1 Moody Underlying  AA+ S&P Underlying

Due 2/1   Dated 3/1/23 Maturity 2/1/53

$152,040,000 Sold

Years   Maturity           Coupon      Yield*

1         2024             5.00%           3.15%

2         2025             5.00%           3.10%

3         2026             5.00%           2.97%

4         2027             5.00%           2.88%

5         2028             5.00%           2.76%

6         2029             5.00%           2.76%

7         2030             5.00%           2.76%

8         2031             5.00%           2.78%

9         2032             5.00%           2.79%

10         2033           5.00%           2.83%

11          2034**       5.00%           2.92%

12          2035**        5.00%           3.10%

13          2036**        5.00%           3.31%

14          2037**        5.00%           3.50%

15          2038**        4.00%           4.04%

16          2039**       4.00%           4.08%

17          2040**       4.00%           4.15%

18          2041**       4.00%           4.20%

19          2042**       4.00%           4.23%

20          2043**       4.00%           4.28%

25          2048**       4.00%           4.37%

30          2053**       4.00%           4.42%

*Yield to Worst (Call or Maturity) ** Call 2/1/33

Source: Bloomberg

This is an example of a new issue priced the week of 2/22/23

Prices, yields and availability subject to change