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Municipal Market Newsletter Archive

Bears Out The Problem

March 9th, 2025 by Kurt L. Smith

Trend reversals take time with long term trends taking a long time to reverse. Throughout the multi-decade stock and bond bull markets we were used to trend reversals. By the time a downward trend was recognized, the odds were the correction was nearing its end and prices began to rise again. You might know this as buying the dips. It worked well for both stocks and bonds following the corrections of 2000, 2008 and 2020. But bonds failed to continue their bull ways while stocks went on to set new highs since then.

Bonds reversed trend in March 2020 almost five years to the day. We have entered a bond bear market, and you know it largely because I remind you every so often. Investors bought bonds on the dip in 2020, including you. Other investors invest in the bond market. Here at The Select ApproachTM, we rely on individual bonds to perform differently from the market.

Rather than selling one’s bonds in 2020 investors continued to buy because they were accustomed to buying dips. Even when the bond market failed to reach new highs in price, investors seemed pleased to buy cheaper bonds at yields much higher than in 2020. Buy more in a bear market? That is the power of Wall Street. That is the power of optimism. That is the power of not knowing the power of a bear market.

Of course, it may also be that investors do not really know how bonds work. Last month I discussed how individuals now own about seventy percent or $3 trillion of the $4.2 trillion municipal market. In a February 12th Bloomberg article, author Martin Z. Braun looked at the returns (after fees) of open-end municipal bond mutual funds compared to customized portfolios known as Separately Managed Accounts (SMAs). Long national municipal open-ended mutual funds delivered 2.25%, -1.01%, 0.83% and 2.21% for one year, three-year, five-year and ten-year respectively. Looking at the performance of long national municipal separate managed accounts (SMAs), those clocked in with 0.58%, -1.35%, 0.47% and 2.13% for the same respective periods.

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Posted in Municipal Market Letter

Bears Out The Problem

March 5th, 2025 by Kurt L. Smith

Trend reversals take time with long term trends taking a long time to reverse. Throughout the multi-decade stock and bond bull markets we were used to trend reversals. By the time a downward trend was recognized, the odds were the correction was nearing its end and prices began to rise again. You might know this as buying the dips. It worked well for both stocks and bonds following the corrections of 2000, 2008 and 2020. But bonds failed to continue their bull ways while stocks went on to set new highs since then.

Bonds reversed trend in March 2020 almost five years to the day. We have entered a bond bear market, and you know it largely because I remind you every so often. Investors bought bonds on the dip in 2020, including you. Other investors invest in the bond market. Here at The Select ApproachTM, we rely on individual bonds to perform differently from the market.

Rather than selling one’s bonds in 2020 investors continued to buy because they were accustomed to buying dips. Even when the bond market failed to reach new highs in price, investors seemed pleased to buy cheaper bonds at yields much higher than in 2020. Buy more in a bear market? That is the power of Wall Street. That is the power of optimism. That is the power of not knowing the power of a bear market.

Of course, it may also be that investors do not really know how bonds work. Last month I discussed how individuals now own about seventy percent or $3 trillion of the $4.2 trillion municipal market. In a February 12th Bloomberg article, author Martin Z. Braun looked at the returns (after fees) of open-end municipal bond mutual funds compared to customized portfolios known as Separately Managed Accounts (SMAs). Long national municipal open-ended mutual funds delivered 2.25%, -1.01%, 0.83% and 2.21% for one year, three-year, five-year and ten-year respectively. Looking at the performance of long national municipal separate managed accounts (SMAs), those clocked in with 0.58%, -1.35%, 0.47% and 2.13% for the same respective periods.

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Posted in Municipal Market Letter

Your Bonds Need Your Help

February 5th, 2025 by Kurt L. Smith

Everyone seems to have some bonds. There are tens of trillions of dollars in bonds out there. The Securities Industry and Financial Markets Association (SIFMA) puts the figure at $46 trillion in the United States and $119 trillion worldwide. Closer to home, municipal bonds now make up $4.2 trillion of the market, per the Federal Reserve, with individuals making up 70% of the market (about $3 trillion) according to Franklin Templeton.

As we discussed last month, investors in the bond markets own the market. Everyone’s portfolio looks like everyone else’s portfolio. When the municipal market started 2024 like a house on fire, everyone benefited. Year-to-date returns, per Bloomberg’s Municipal Bond Index, approached double digits through the first three quarters, only to lose almost all of it in the fourth quarter.

This is what happens when you are not investing with the trend. The trend for bonds is lower prices. I discussed for many months how trending markets will usually undergo a multi-month correction, and that is how I was describing 2024’s bond performance. Individuals piled into municipals, not realizing they were buying into a bond bear market and at the wrong time.

Investing in bonds the same way one has always invested in bonds is…, well you tell me. Look at your results over the past year, or three years, or five years. You are investing in a market in which the trend is down. And you are paying for the privilege, either a little, or a lot.

When it comes to bonds, it also does not matter what fund you own or who the manager is or what their past performance has been. You own bonds and in a bear market your performance is going to suffer. Since seemingly no one has determined that this is a bond bear market, I would say the greatest suffering is yet to come.

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Performance Matters

January 6th, 2025 by Kurt L. Smith

It is the new year and with optimism gripping the financial world ebullience is everywhere. Contagion? Evidently because everyone is excited for the new year, the new administration, new tax laws, less regulation…a veritable Shangri-La here at home.

Unfortunately, the bond market failed to get the message. Or perhaps it did; just think about how bad the bond market would be if there was not a contagion of optimism?

The scorecard for 2024 is now out and bonds were not the place to be. Not just compared to the one-two punch of stocks for the second straight year, but as a standalone asset class. Bonds should yield something, particularly when people are buying them left and right because, hey, they now yield something.

The results say otherwise. For the year, the Bloomberg US Treasury Index clocked in with a +0.58% gain for the year (all prices and yields per Bloomberg).  If we add Corporate Bonds and Mortgages to the mix, the Bloomberg US Aggregate Bond Index finished up 1.25% for the year while the Bloomberg Municipal Bond Index, a highflyer almost year all year as we discussed in the October 28th letter when up 9.81%, finished up a mere 1.05% for the year.

Longtime readers know this is not a new phenomenon. Performance figures in a bond bear market are difficult because the wind (the trend towards lower interest rates) is no longer at your back but instead buffet you in the face (as the trend is toward higher interest rates). It has been almost five years since the bond bear market began in March 2020. In now appears we are almost halfway through what is shaping up as a lost decade of bond market performance.

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Come On In

December 6th, 2024 by Kurt L. Smith

One of the sales pitches for buying bonds (albeit an effective one) these past few years has been to buy bonds because now they earn you something. But while everyone knows 3% or 4% is greater than 1% or 2%, it is hardly a reason to do something silly.

The fact that interest rates were once near zero and now they are not should give you pause. Higher interest rates are not a recipe for bond investment performance. It was the trend toward lower interest rates over three decades that provided the wind in the bond bull market’s sails. With the new trend of higher interest rates, bond investors face headwinds that crimp performance.

Taking a longer-term perspective may help. The “higher” interest rates we now have are like where they were ten years ago. We buy a number of bonds issued ten or so years ago, so I am reminded daily. It also explains why the Bloomberg Municipal Bond Total Return Index for the past ten years is 2.73%. On December 2, 2014, the Index stood at 1064 and last week on November 29, 2024, it was 1355 (all prices and yields per Bloomberg). This Index covers the long-term tax-exempt bond market across four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds.

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Bonds Reverse on News

October 28th, 2024 by Kurt L. Smith

The Federal Reserve’s September 18th rate cut was the news. This move followed excitement for the cut as three-month treasury bill yields moved from about 5.40% in July to 4.75% on the 18th. Six-month treasury bills moved from 5.30% to about 4.50% in the same time frame (all yields and prices per Bloomberg). The Fed merely followed the markets, as expected.

While the short-term interest rates have largely held in since the cut, longer term bonds have tanked. Sell on the news indeed! Our bellwether poster child, the US treasury bond 1.25% of May 15, 2050, sold at just over 56 on September 17th and below 50 today, October 25th. This is essentially the same level the bond traded at on October 24th, 2022.

It is difficult to make money in a bear market. The first step needed is to recognize that this is the trend. We reached this point years ago, back in 2020 when the bellwether sold at twice its current price, near par. Most investors have failed to recognize this first step. They have done what most investors have done: they held and/or doubled down. Unfortunately, with respect to bonds, they have not held bonds which have treated them well.

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Is This It?

September 25th, 2024 by Kurt L. Smith

For about eleven months now, bonds have traded higher in price and lower in yield in the most recent correction of the nascent bond bear market. From near 0% interest rates in 2020 to over 5% in 2023 in longer US treasury notes (below 0% to 5.50% for treasury bills), corrections are natural movements in how trends are developed.

While bond prices have rallied, we have also seen stocks hitting new highs as well. Even the Federal Reserve jumped on the bandwagon cutting rates this week to fulfill the promise made last month.

Yet for so much time, for so much work, the rebound in bonds looks pathetic. Most, if not all, of the rally occurred in the final nine weeks of last year. Our favorite long treasury bond, the 1.25% of May 15, 2050, traded at 43.25 on October 20th, 2023, and just over 55 on December 28th, weeks later. That’s a nice 27% gain for prescient traders, but a far cry from the 102 on August 6th, 2020 (all prices and yields per Bloomberg). This is what a bond bear market looks like.

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Fixin’ To

September 6th, 2024 by Kurt L. Smith

In late August we finally received the word from the mount on high. From his temporary perch at Jackson Hole, Federal Reserve Chairman Jerome Powell delivered his “time has come” speech. Treasury bills, the leader in all things short term, had obviously received advanced word as short-term interest rates broke to yearly lows.

Last month we noted treasury bills had fulfilled the requirements for a correction. We have long noted the key problem with corrections (like the problem with market tops) is it is tough to know how low low is (or how high high is). August brought us the strongest drop for yields in over a year as both three- and six-month bills hit new yearly lows. Chair Powell obviously noticed.

We are not treasury bill traders. Whether you are receiving a 2% taxable return on your cash in 2019 or 0% for the two years following the March 2020 beginning of the bond bear market, is not my primary concern. You would not have been happy then or even now when you are earning more. Selecting worthwhile municipal bonds is the key to your bond portfolio performance.

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Change Appears At Hand

July 31st, 2024 by Kurt L. Smith

In April my letter examined whether the Federal Reserve would begin cutting rates. Optimism abounded as the ten-year treasury note yield fell from 5% to 3.88% (prices rose) in the fourth quarter of 2023 (all prices and yields per Bloomberg). By April such optimism had taken a hit as higher yields (lower prices) left the bond market correction hanging on by a thread.

Since October of last year, the treasury market has been in a correction. From near 0% (0.31%) in March 2020 to 5% on ten-year treasury notes, the market was due, if not overdue, for a correction. Short term treasury bills had seen a similar run from negative yields on the six-month treasury bill in March 2020 to 5.59% in August of last year, with most of the move happening in the preceding twenty months.

The bond market correction has not only hung in, but treasury bills (three months and six months) hit their lowest yield (highest price) in the correction last week, completing an A-B-C correction. Three-month bills moved from 5.51% on October 6th to 5.28% this week, while six-month bills went from 5.59% to 5.12%. A ten month correction of a twenty month move? One can make an argument that short term treasury bills next move from here is toward higher interest rates not lower.

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Managing Municipal Bond Portfolios

June 28th, 2024 by Kurt L. Smith

It seems we cannot get enough of municipal bonds, taxable or tax free. The deals keep coming, the orders overflow, and some even get filled. Shampoo, rinse and repeat.

More demand than supply should keep bond prices buoyant. Unfortunately, financial products do not work that way. Wall Street’s job is to supply more when demand is high, and Wall Street is doing exactly that by creating more and more bonds (debt) to keep up.

Demand is high so municipal bond deals are large as well, some well over a billion dollars. According to Joe Mysak, Bloomberg’s long-time resident municipal bond market expert, this week marked “the 27th deal of $1 billion or more, with overall borrowing accelerating at a torrid pace.” Amazingly, the municipal bond market remains around $4 trillion, the same as 2020, according to SIFMA website. Actual current figures are $4.1 trillion, the same as two years ago and barely higher than $3.9 trillion in 2019. So perhaps the $200 billion difference is due to larger deals! Shampoo, rinse and repeat as old bonds mature and they need to be replaced.

So how does one manage municipal bond portfolios? Largely they are managed with scale. This is where new deals like this month’s Eagle Mountain – Saginaw ISD featured bond comes into play. The best time, perhaps the only time, to buy a $5 million, $10 million, or $25 million piece is when they are first distributed. This is not new. The new issue market has been on the shampoo, rinse repeat treadmill for many years.

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