Interest Rate Cut Coming Wednesday

Short term U.S. Treasury yields continue to fall paving the way for another twenty-five basis point interest rate cut by the Federal Reserve at this week’s December 10 meeting. the six-month treasury bill fell from 5.59% August 29, 2023, to a new low of 3.68% last week, taking money market yields lower as well.

In a report issued by Crane Data on December 3, money market mutual fund assets recently broke the $8 trillion level for the first time, up from $6 trillion in August 2023 and $4 trillion in 2020, the COVID year. Cash may not be king, but these levels dwarf the $4 trillion-plus municipal bond market.

Obviously, investors of cash are willing to accept less returns as rates on short term securities and money market mutual funds have decreased since the Federal Reserve began cutting interest rates from 5.50% in September 2024 to perhaps 3.75% Wednesday. But unlike their long-term bond brethren, lower rates on money markets do not equate to higher prices and better performance. Lower rates on money markets merely gets you less: lower yields earn you less return.

This explains why longer-term bonds continue to be a high buzz asset class. Best to lock in these higher yields on longer bonds before they too shrivel like money market yields. We have only one month left in 2025 and if longer term interest rates can just hold in there, then purveyors of bonds will have 2025 performance figures to hawk further into 2026.

I will leave the hawking of bonds to others; that is not a winning strategy in my opinion. Investors are looking for stability and are finding it with short-term money market instruments, even if it means accepting lower yields. With $8 trillion in money market mutual funds, not to mention other short-term alternatives such as the direct ownership of the same instruments these funds invest in, there is plenty of interest in preservation of capital.

With trillions here and trillions there, scale has come to dominate almost all financial markets. This has been a winning strategy, if not THE strategy for many years. This is because many markets have performed as a bull market for all these years. This is not the case for the bond markets. As we have discussed for many years in this letter, the bond market is not performing; it is in a bear market.

Combining scale together with a bear market is a dangerous combination. You do not know where your risks are in scale investments until they bite you, which is too late. You do not know if no or a large percentage of the investment is in a type of credit that blows up overnight (or even over many months). But most importantly you do not know how much leverage your scaled portfolio has because this is almost impossible to ferret out.

I leave scale for others in the municipal bond market. New issues provide the scale for those in the scale game: banks, insurance companies, mutual funds, and individual investors through separately managed accounts (SMAs). New issues are an asset grab and are awarded to the buyer willing to pay the most and accept the lowest return. Fine by me.

Municipal bonds are one asset class that has unscalable components. There are tens of thousands of varieties with different CUSIPs, different credits, different maturities, and different performance characteristics. All of these become more important characteristics when the bond market is not in bull/scale mode.

While the odds of a Federal Reserve interest rate cut remain high this week, we continue to discover municipal bond alternatives for our clients that we believe to be worthwhile. This is The Select Approach^TM and I hope you continue to enjoy its results.

Princeton Independent School District, Texas

Unlimited Tax Refunding Bonds

Series 2025

A1 Underlying Moody’s AA- Underlying Fitch

Aaa/NR/AAA on The Permanent School Fund Guarantee

Due 2/15   Dated 11/25/25 Maturity 2/15/44

$39,390,000 Sold

Years   Maturity       Coupon        Yield*

0         2026             5.00%           2.67%

1         2027             5.00%           2.70%

2         2028             5.00%           2.67%

3         2029             5.00%           2.65%

4         2030             5.00%           2.65%

5         2031             5.00%           2.70%

6         2032             5.00%           2.76%

7         2033             5.00%          2.90%

8         2034             5.00%          2.92%

9         2035             5.00%          3.00%

10       2036**          5.00%          3.10%

11       2037**          5.00%          3.25%

12       2038**          5.00%          3.37%

13       2039**          5.00%          3.50%

14       2040**          5.00%          3.67%

15       2041**          5.00%          3.81%

16       2042**          5.00%          3.94%

18       2044**          4.25%          4.33%

*Yield to Worst (Call or Maturity) **Callable 2/15/35

Source: Bloomberg

This is an example of a new issue priced the week of 12/1/25. Provided for illustrative purposes only and is not a recommendation to buy or sell any specific investment.

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.