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Archive for the ‘Municipal Market Letter’ Category

Evaporating Asset Prices

August 1st, 2022 by Kurt L. Smith

Another down week on Wall Street but who is counting? Obviously, everyone because we know that number to now be six, as in six weeks. But I digress as I am a bond guy so let me keep on task. Another down week for bonds, all told close to 110 now since the top in bond prices, but who is counting… besides me?

This week we set new lows in price for the bellwether ten-year and thirty-year U.S. Treasury note and bond. Now those unprecedented year to date bond returns we saw last month are even more unprecedented. The worst ever start for US treasuries is beginning to be felt in other markets.

Thus far market prices have simply evaporated. Some call this orderly; others call it a reset. Stock prices for companies that were formerly considered home runs (think Peloton, PTON) have now retraced all their home run up. From a $18 low in March 2020 to $171 in January 2021 and below $12 last week (per Bloomberg), PTON does not stand alone with this chart. You can find other stocks and ETFs have similar looking charts. There is a lesson here: only sell the stocks you want to record a gain because later you might not have one.

But back to bonds. Unlike stocks, where values are created or destroyed based on the share price of the last share traded, bond prices can evaporate without any such trading. Think about that. And think about it some more because, in my opinion, it is bond pricing that is wreaking havoc with asset prices.

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Merely Gaining Steam

April 28th, 2022 by Kurt L. Smith

Last month I discussed whether the bond bear market had finished its first leg down or was it merely gaining steam. Over the past few weeks, we got an answer to that question.

I also discussed the importance of stocks moving to new highs or there is a risk for a larger correction. What is a larger correction? I believe we can place Netflix (NFLX – NASDAQ) as the new poster child for the definition of larger correction. At its recent price of $193.50 on April 27, 2022 (all prices and yields per Bloomberg), Netflix is down 72% from its all-time high of $700 set just five months earlier on November 11, 2021. Again, merely gaining steam.

The “What, me worry?” crowd continues to fiddle while Rome burns. The losses in bellwether US treasury notes and bonds over the past several months is unprecedented. The losses in the NASDAQ for April 2022 may be among the worst months ever. 3% mortgages are now 5% mortgages and inflation is, pick a number, 8%?

My get-out-of-bonds mantra for the past two years has now morphed into get-out-of stocks. Normalcy was exceeded months ago and is now moving toward extreme, yet capitulation evades us. Instead, we are looking at wave after wave of continued downward prices for financial assets.

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Worst Quarter Since 1973

March 30th, 2022 by Kurt L. Smith

Bloomberg published this line on March 22nd as their US Treasury Index had lost 5.55% since year end, surpassing the 5.45% loss at the beginning of 1980, the biggest quarterly decline since their index was created. In the middle of the bond bear market’s first move, this type of poor performance is to be expected.

Some people look at the bond market’s performance as the tortoise versus the stock market’s hare. Every day, bond investors look into the mirror (at bond performance) and it looks as if little has changed. Here, in the early stages of the bond bear market, nothing could be further from the truth.

The yields on the risk-free US treasury bellwethers we track have soared over the past two years. The 1.5% treasury note of February 15, 2030, sold at a .31% yield (111-19) on March 9, 2020 (all yields/prices per Bloomberg). This past week that note traded at 2.52% (92-23). This is an almost 19-point loss or 17% on the bellwether ten-year treasury note. Longer maturities fared far worse. Our bellwether is the 2.375% of November 15, 2049, and it sold at .70% or 140-17 on March 9, 2020. Last week this bond sold at 2.67% (94-09) for a 46-point loss or 33% of value.

Bond bear market? I do not recall reading that headline in the New York Times or splashed across magazine covers of late. But a dribble here and a dribble there while looking in the mirror has eroded significant values in the risk-free-rate US treasury market.

Almost all this price erosion happened before the Federal Reserve hiked interest rates. That did not happen until March 16th. So much for fed leadership; how’s that for Fed response?

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Now It Gets Interesting

February 17th, 2022 by Kurt L. Smith

Long-term investors, I mean old investors, have experienced market reversals. As night becomes day, market selloffs lead to new, higher prices. This law of nature does not apply to markets, though one’s experience tells one otherwise.

Over the last 40 years we have seen downdrafts leading to new highs. You remember the dates: 1987, 2000, 2007, and lately, 2020. What you may not be aware of is the same dates also saw similar action in bonds. The long-term bull market for stocks was mirrored by bonds. Bond and stock performance marched ever upward, together…until they did not.

I have worked hard to let you know the bull market in bonds is over. Yields traded at such a next-to-nothing interest rate in March 2020 resulting in record high bond prices. Compared to the double-digit yields of the early 1980s, which equated to record low bond prices, I believe the bond market has completed its long bull market journey. The bond bull market is over, and you should not own bond mutual funds.

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More of the Same

January 31st, 2022 by Kurt L. Smith

No, I did not delay writing this letter until we heard from the Federal Reserve on Wednesday afternoon. When was the last time the Fed surprised? Indeed, this Federal Reserve chair, Jerome Powell, is more of the same.

In the mold of the maestro, Alan Greenspan, Powell serves up optimism with the confidence that the Federal Reserve has “our tools and we will use them” to get the job done. Not only does he have the tools, but he also has experience using them. Whereas former Fed chair Bernanke questioned whether he had the authority to act and act boldly, Chair Powell suffers no such hesitation. He has already been there and done that.

Chair Powell has decisions to make. Inflation is the worst in 40 years, interest rates are rising without his involvement and the Federal Reserve balance sheet now stands at $9 trillion ($8.867TR, per Bloomberg). Thankfully everyone is working…everyone that hasn’t retired, quit, or been sidelined by COVID

This past month things are beginning to break down. Our beloved bond market, the one I continue to shoo you away from, continues to deteriorate. One should not own bond mutual funds which has been my stance for almost two years now. Benchmark yields such as the two-year US treasury note or the ten year note have risen substantially, yet Fed Chair Powell continues to wait.

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Bonds Continue Their Roll (Role)

December 29th, 2021 by Kurt L. Smith

Another year, another dollar. Certainly explains the bond market.  As no-to-low yields continue to dominate the bond market, a dollar is about what many new bonds will pay you. And with little volatility, like stocks, total returns were positive. In other words, bonds fulfilled their role.

Only the US Treasury Total Return was negative this year, with Corporate Bonds and Municipal Bonds positive per Bloomberg’s indices. The US Treasury performance, while a loser, didn’t lose much year-over-year. With the melt-up of 2019 culminating in March 2020, US Treasury bond (past) performance looks stout. Again, bonds did their job.

But at current no-to-low yields, past performance is priced in. Many investors will look at the year and probably make few, if any, changes.  Why change what is working? There is no need to dump bonds as they have seemed to do their job, fulfilling their role.

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Streaks End

November 30th, 2021 by Kurt L. Smith

Streaks don’t last forever. This past weekend in college football proved that. The college football playoffs this year will not include Clemson, Ohio State or Oklahoma. Despite all reason, the best talent, and the fact we all love winners, the playoff runs for these schools has ended. Only Alabama’s hope remains. 

Time will tell whether this is but a minor setback for these perennial powerhouses or one of long-lasting stature. I know the differences. I am a (now) long suffering Texas Longhorn fan. 

I also called the end of the bond bull market as March 6, 2000. An almost forty-year winning streak for the bond market is now over, yet many do not share my certitude, even after twenty-one ridiculously long months. 

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Correction Over Reexamined

October 27th, 2021 by Kurt L. Smith

No, I am not referring to recent stock market activity, but hopefully I got your attention. Since July’s letter “Correction Over” bonds have performed poorly, as expected. While the bond market’s poor performance has yet to rub off on other markets, it would be a mistake to ignore what is unfolding.

Interest rates are rising and not just a little. I continue to watch the bellwether US Treasury bond, the 2.375% of November 15, 2049, which traded at 113 back in July when I wrote “Correction Over” (yields and prices per Bloomberg). This past week the bond traded at 105 for an 8-point loss over three months.

The ten-year US Treasury note, the 1 ½% February 15, 2030, traded at 103.75 (1.04%) in July and 99.25 (1.60%) last week for a 4.5-point loss. But it was the five-year US Treasury note, the .25% of August 31, 2025, which really moved from .63% in July to a doubling to 1.25% last week. Those five-year treasuries traded over 100 in September 2020 and last week traded at 97 (1.04%). Originally buyers of this short, five-year note, have seen twelve years of income in market value evaporate over the past fifteen months. Thank goodness the note will mature at par, though in 2025!

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Low Rates Are Not Enough

September 27th, 2021 by Kurt L. Smith

For almost forty years interest rates have moved lower and for many of us we will forever regard today’s rates as low. This is nothing new. We have lived in a low interest rate environment now for many years.

Not content with relying solely on the economic drivers of low interest rates, the Federal Reserve has, at various times these past many years, decided it also needed to buy bonds. Evidently low rates are not enough.

Buying bonds might spur you or your brethren to also buy bonds. After all, bond prices can move upward just like other asset prices and in 2020 the prices for US Treasury notes and bonds soared.

Despite continued Federal Reserve bond buying, US Treasury notes and bonds climaxed in 2020. Investors know that down forty percent in price represents quite a climax. What happened Fed? Why aren’t investors continuing to buy US Treasury notes and bonds and following your lead?

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What Is An Investor To Do?

August 24th, 2021 by Kurt L. Smith

For forty years you have known the answer to this question. You buy and you buy more. Hindsight is wonderful and it also can give you great confidence. Stay the course, invest with us…turn on the television and follow the financial ads. So easy.

Except the world changed eighteen months ago. Not the pandemic; the bond market top-ticked almost forty years of a bull market. As a reader of this letter, you know the bellwether US treasury bond had a final run-up of forty points and then lost all of that. The bond bull market is over.

You may question, or continue to question, the relevance of such a situation. Obviously stock investors do not care, judging by the corresponding market move in stocks. But what is eighteen months in the scheme of things?  We are talking about your retirement or managing money (yours or others)?  These are long-term concerns. Besides, what if the run-up in stocks is merely the stock version of what we saw in bonds in 2020? What happens when stocks top-tick?  The status of the bond market is relevant, regardless of how or when it chooses to assert itself.

I do not need higher interest rates to find worthwhile bonds. I can do it in a low-to-no-interest rate environment as I have for the past ten-plus years. My interest in following the bond market, particularly the movement of US Treasury bellwether’s is because it matters.

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