Now It Gets Interesting

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.

Since New Year’s, we have seen a continuation of weaker and weaker bond prices. I am not surprised as this is the direction of trend. The US treasury bellwether note and bond we watch recently traded at new high yields not seen since 2020. The ten-year treasury note traded at a yield of over 2% while the thirty-year bond, which has been holding firm, let go and has traded at a new high yield and low price (all yields and prices from Bloomberg). The two-year treasury note, which traded below .10% in 2021, has now traded over 1.60%, a level not seen since 2019.

These are meaning price changes which has done a number on many fixed income investments. Look at the prices and indices in fixed income that you regularly follow. The trend is in, having set new lows in prices for our bellwethers almost daily lately, and not finished. Fixed income investment performance is suffering.

It is the performance of bonds that has broken the hand-in-glove performance with stocks. Rather than moving to new highs, bond prices have reversed course. Rather than portending an environment signaling ever lower interest rates (lower for longer) now and into the future, the bond market has instead moved in a different direction. The stock market has so far been slow to notice, though it appears to me this is changing.

The setup for stocks, pricewise, looks eerily familiar to 2007 and 2020 to me. Volatility-wise, the setup looks eerily familiar to 2007 and 2020. This makes the next few weeks very important for the markets.

So far, the bond market sell off has been a steady erosion without capitulation. The performance of US treasury notes and bonds, corporate bonds, and municipal bonds were surprisingly poor since the start of the year, with US junk bonds posting their worst January ever and worst month since March 2020 (per Bloomberg). Just think what capitulation may mean.

I continue to stress liquidity as a primary concern. Who will own bonds when it appears no one should own bonds if the trend is for higher yields and lower prices? This should be a trading opportunity when it comes, but we are not there yet. The larger issue is for stocks, with stock prices still marginally close to their record high prices. One should consider the consequences of a downdraft in prices when the new bond market trend appears to be working against stocks rather than in support.

Cash is king and I believe The Select Approach^TM offers your cash an alternative others do not have. We continue to find worthwhile bonds in this environment of rising rates and inflation.

Arlington Independent School District, TX

Unlimited Tax General Obligation and Refunding Bonds, Series 2022

Aa1 Moody    AA S&P

Aaa/AAA/NR on PSF Guarantee

Due 2/15   Dated 2/15/22 Maturity 2/15/47

$176,370,000 Sold

Years   Maturity            Coupon      Yield*

1             2023               5.00%            0.67%

2             2024               5.00%           0.94%

3           2025              5.00%           1.07%

4             2026             5.00%           1.23%

5            2027             5.00%           1.31%

6            2028             5.00%           1.38%

7            2029             5.00%           1.47%

8             2030              5.00%           1.54%

9             2031              5.00%           1.60%

10           2032**          5.00%           1.66%

11           2033**          5.00%           1.71%

12          2034**         5.00%           1.75%

13          2035**         5.00%           1.79%

14          2036**         5.00%           1.81%

15          2037**         5.00%           1.82%

16          2038**         4.00%           2.01%

17           2039**         4.00%           2.04%

18           2040**         4.00%           2.07%

19          2041**         4.00%           2.09%

20           2042**         4.00%            2.11%

21           2043**         4.00%            2.14%

22          2044**          4.00%            2.17%

25         2047**          4.00%            2.24%

*Yield to Worst (Call or Maturity) ** Call 2/15/31

Source: Bloomberg

This is an example of a new issue priced the week of 2/7/22

Prices, yields and availability subject to change