Bonds Rolled Over (Again)

From the front pages this summer, the story on bonds is they are no longer a story. Prices have rolled over as yields have risen and investors who bought on the price dips lately may be rethinking their commitment.

I have spent most of the last few years, as well as the last few months telling you this was the end of the run, not the beginning of a new one. The performance of the bond market over these years fits my description.

After several years of higher yields and lower bond prices, the bond market began a price correction late last year. But it was the performance of long-term treasury bonds in July and August of this year that received the out-sized attention. One of the longest treasury bonds, the 2.875% of 2049, rallied from about 100 in May, to 105 in July and 122 in August (source: Bloomberg, with prices rounded for conversation sake). Quite a move for a bond yielding less than 3%.

But as I said, I expected the move to be the end of something and indeed that has been the case so far. The treasury bond sold off about half of its gains (11 points) in a matter of days in early September, before bouncing back to 119, only to be trading at new four month lows now below 110. An opportunity in long-term bonds? Only for traders and speculators in my opinion as the long-term trend for bond prices should now be solidly lower for quite some time.

A rallying market with a twenty percent final thrust…remind you of another market? Gold as well as Stocks, appears to be following in a similar bond market pattern. Most stock market indices have set new record highs (as did long U.S. Treasury bond prices with record low yields) and like bonds, I see this as the end of something as well. Gold performed similarly with Bonds rising from $1275 in June to $1550 in September for, how about that, a 21% move.  For Bonds, Stocks and Gold, I believe that the traders and speculators may be the only ones who profit, except it seems everyone is only buying when a sell appears warranted.

I am obviously a believer in markets. We are in the beginning stages of correcting thirty-plus years of a bond bull market. I told you 2012 was the turning point and yet we saw a rally into 2016. New lows in 2018 became a rally in 2019 and we should see further lows in prices in the years to come.  Lower bond prices are the trend (higher yields) but there will be times in which the opposite occurs as a correction.

Speaking of markets, have you noticed how the Federal Reserve responds to the bond market?  The Fed raised rates 0n December 19, 2018 just weeks following the early November highs in longer term treasury yields.  The bond market rallied strongly before the Fed reversed course with an interest rate cut on July 31^st, following up with another cut in September and one last month in October.  The Fed is not setting an interest rate policy; the Fed is responding to the bond market.  The Fed doesn’t control the market; the market dictates to the Fed.

One effect of this year’s bond market rally was low trading volume. Why would anyone sell bonds this summer when all the talk about bonds seemed centered upon how well they were doing? While volume was low, amazingly we continued to find bonds we believe to be worthwhile.

Now with the rally behind us, the bond markets should deliver wonderful surprises as investors discover that double-digit price losses on long-term bonds may yet just be the beginning. The market giveth and it also taketh away.

Asset prices look to me to be precarious as bonds have rolled over with gold and stocks on deck. We will continue to work our plan and I appreciate your patience through this slow period.  I honestly believe we should have more to chose from in the coming months.

Carroll Independent School District, TX

AAA (AA+ Under) Standard & Poor’s

Permanent School Fund Guaranteed

Due 2/15 Dated 12/1/19 Maturity 2/15/2044

$58,120,000 Sold

0 2020 5.00% 1.14%
1 2021 5.00% 1.16%
2 2022 5.00% 1.19%
3 2023 5.00% 1.23%
4 2024 5.00% 1.27%
5 2025 5.00% 1.34%
6 2026 5.00% 1.44%
7 2027 5.00% 1.52%
8 2028 5.00% 1.64%
9 2029 5.00% 1.74%
10 2030** 5.00% 1.81%
11 2031** 2.375% 2.49%
12 2032** 2.50% 2.56%
13 2033** 2.625% 2.64%
14 2034** 2.625% 2.70%
15 2035** 2.75% 2.77%
16 2036** 2.75% 2.81%
17 2037** 2.75% 2.84%
18 2038** 2.75% 2.87%
19 2039** 2.875% 2.89%
20 2040** 2.875% 2.90%
21 2041** 2.875% 2.93%
22 2042** 2.875% 2.96%
23 2043** 2.875% 2.99%
24 2044** 2.875% 3.00%

*Yield to Worst (Call or Maturity) **Call 2/15/2029

Source: Bloomberg

This is an example of a new issue priced the week of 11/12/19

Prices, yield and availability subject to change