Bond Bear Market Enters Next Phase

I have been looking for higher interest rates since my Early Stages letter March 10th along with the follow up Wild Swing letter April 6th. The market has delivered. Across all maturities of U.S. Treasury securities, rates have jumped, bond prices have fallen, and performance figures for treasury investors renewed their downward slide.

Yet despite the rise in treasury yields, I did not believe they indicated the Federal Reserve should or would raise interest rates last week, even a small 25 basis points. So, guess the result? In my view, faced with an opportunity to lead (cut rates) or follow (like decades of Federal Reserve policy before him), new Chairman of the Federal Reserve Kevin Warsh chose to follow.

Traditional wisdom holds that the Federal Reserve can influence short-term rates, but it is the market that determines longer-term rates. At least the traditional wisdom is half right; In my view, the market controls all rates, and the Federal Reserve follows closely so not to lose what credibility it has.

In my opinion, the Federal Reserve’s credibility suffered greatly last week. With inflation running over the Federal Reserve’s target 2% rate for the past five years, treasury investors appear to be demanding more yield to compensate. But even with interest rates on ten-year and thirty-year treasuries trading near or at twenty-year highs, the question of how high inflation can run or how high is high for interest rates remains.

Performance figures for US Treasuries per Bloomberg’s US Treasury Index have slipped to negative for year to date (-0.67%), a barely positive 1.28% for one year, -4.62% for five years and 7.95% for ten years. Treasury investors have earned less than 1% per year over the past ten years.

Many investors, who evidently keep up with performance figures, appear to be electing to keep their investments in cash, as money market mutual funds now contain a record $8 trillion, roughly double the figure in early 2020 when the bond bear market was born. Even with next-to-nothing returns for the early years of this decade, money market returns remained positive while most things bonds have struggled. Yes, positive returns of cash, even treasury bills, trounces the returns of the US Treasury Index as well as investments that hope to keep up with the Index. Indeed, the bear market for treasury securities is moving ahead.

Performance figures for Aggregate Bonds (treasuries plus corporate bonds and mortgages) as well as Municipal Bonds so far continue to hang in from my perspective. In my opinion, -this is indicative of the extreme optimism we have experienced in the bond market these past few years as investors adopted a price to perfection stance demanding very small credit spreads for lesser credit quality resulting in higher Aggregate Bond and Municipal Bond prices leading to better performance figures over the past few years than Treasuries alone.

Performance figures are all about the past of course and this letter has let you know what I believe is coming. Bloomberg’s Municipal Bond Index declined 1.77% in July for the worst July performance since 2003 and only the second monthly loss (March was the other) of this year. March was already the worst month since the bond market’s low in 2023 and now we have July’s performance as a follow up. If you are not convinced the bond bear market is back and flexing its downward price muscles, March and July’s performance figures may suggest otherwise.

Do not expect to see much in the way of bearish bond prognostications. In my opinion, Wall Street, along with insurance companies that manage bond portfolios, earn too much on the trillions of dollars in bonds they have under management to suggest cash might be a better alternative. Recognizing a bear bond market, let alone suggesting or advocating selling bond holdings goes against their business model. More than likely, we will continue to hear “look at that yield!”

Worthwhile municipal bonds do exist, and we continue to find them for our clients, both taxable as well as tax-free. We will continue to be selective as this bond market continues to surprise on the downside taking bond performance figures down right with it. In our view, the key is owning worthwhile bonds as the market continues to weaken.

Birdville Independent School District, TX

Unlimited Tax School Building And Refunding Bonds, Series 2026

Aaa Moody (Permanent School Fund Guarantee) Aa2 (Underlying)

Due 2/15 Dated 8/1/26 Maturity 2/15/56

$175,355,000 Sold

Years Maturity Coupon Yield*

1 2027 5.00% 2.67%

2 2028 5.00% 2.77%

3 2029 5.00% 2.87%

4 2030 5.00% 2.97%

5 2031 5.00% 3.09%

6 2032 5.00% 3.16%

7 2033 5.00% 3.30%

8 2034 5.00% 3.39%

9 2035 5.00% 3.49%

10 2036 5.00% 3.58%

11 2037** 5.00% 3.68%

12 2038** 5.00% 3.76%

13 2039** 5.00% 3.84%

14 2040** 5.00% 3.95%

15 2041** 5.00% 4.01%

16 2042** 5.00% 4.05%

17 2043** 5.00% 4.12%

18 2044** 5.00% 4.20%

19 2045** 5.00% 4.27%

20 2046** 5.00% 4.37%

21 2047** 5.00% 4.47%

22 2048** 5.00% 4.56%

26 2052** 4.25% 4.75%

30 2056** 5.00% 4.78%

*Yield to Worst (Call or Maturity) **Callable 8/15/36

Source: Bloomberg

This is an example of a new issue priced the week of 7/27/26. 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.