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Whether single digit losses (so far) for bond funds or double-digit losses in long-dated treasury notes and bonds, the point I want to stress is the bond bull market is over. It ended March 6th, 2020.

Should We Be Traders?

March 24th, 2021 by Kurt L. Smith
  • One year ago, I wrote my March 6th letter highlighting the risks of bond market investing when treasury securities all yielded less than 1%. It was a watershed moment and one I believed would be a reference point for years to come.

    We have been following the bellwether treasury note and bonds as they continue to lose value as interest rates move higher. The ten-year note, 1.50% of 2/15/30, traded this past week below par at 98-22, down from 111-19 on March 9, 2020 or 11.5% lower (all prices from Bloomberg). The thirty-year bond, the 2.375% of 11/15/49 traded at a discount of 97-11+ versus 140-17 on March 9, for a 30.7% loss.

    From a trading perspective, original buyers of these treasuries have watched their portfolio values surge and then come back to earth. A forty-point gain in the long bond is now wiped out. This is the nature of buying into a late-stage bull market. How high is high? Will you know it when you see it? Will you act or freeze?

    My March 6th letter implored you to point-and-click away from fixed income funds. With low treasury yields (high prices) and low spreads on other spread products like corporates, mortgages and municipals, March 6th would probably be the high-water price mark for almost all managed (and unmanaged) bond portfolios.

    I hope you did act with respect to your other bond holdings. March 6 has indeed served as a formidable price for bond funds. Some funds did surpass the March 6th level, but now as treasuries continue to sink in price, we are beginning to see the effect of the bond bellwethers on other types of bonds.  Vanguard’s Total Bond Market Index Fund (VBMFX), one of the largest bond funds, was holding up in my January letter but last week traded at 11.12, down 6% from its 11.79 high on August 4th as well as trading below the 11.63 of March 6th, 2020.

    Whether single digit losses (so far) for bond funds or double-digit losses in long-dated treasury notes and bonds, the point I want to stress is the bond bull market is over. It ended March 6th, 2020. While it is important to note I believe bonds no longer have a place in an investment portfolio, my greater concern is the effect on other assets, namely stocks.

    From 1981 to 2020, the bond bull market has provided the fuel for the 1981 to 2021 stock bull market. Without the one (bonds) you would not have the other (stocks) to this extent. The reason is leverage. Without bonds, earnings per share would be a fraction of what they are now.  Corporate bonds provide the ongoing fuel for stock market performance…until they no longer do. To underestimate the value of leverage, the value of declining interest rates and the value of a bond bull market on stock prices, to me, is a clear and present risk. Owning stocks now, I believe, is like owning the bellwether bond last year. Wow, look at how high ‘high’ is. But if you are not selling, what difference will it make?

    This is not the buy-and-hold market that has gotten you to this point. Those days are behind you. Not selling, I believe, will cost you, perhaps cost you plenty. This does not apply just to stocks and bonds, but to all asset classes. The reason is the same…for all asset classes…the effects of leverage and the long bond bull market. Give it the thanks it deserves, glad you did not buy long-dated treasuries after all and continue to prepare, I mean sell. Selling is a tough skill; I suggest you practice.

    New Caney Independent School District, TX

    Unlimited Tax School Building Bonds, Series 2021

    Aa3 Moody Underlying AA- Fitch Underlying (Aaa/NR/AAA Permanent School Fund)

    Due 2/15   Dated 4/1/21 Maturity 2/15/51

    $49,170,000 Sold

    Years   Maturity     Coupon      Yield*

    1             2022           2.00%           0.11%

    2            2023            2.00%           0.14%

    3             2024            5.00%           0.26%

    4            2025           3.00%           0.38%

    5            2026           3.00%           0.50%

    6            2027           3.00%           0.64%

    7            2028           3.00%           0.76%

    8            2029           5.00%           0.90%

    9              2030            5.00%           1.04%

    10           2031            5.00%           1.13%

    11           2032**      3.00%           1.32%

    12           2033**      3.00%           1.39%

    13          2034**      3.00%           1.48%

    14          2035**      2.00%           1.81%

    15          2036**      2.00%           1.88%

    16          2037**      2.00%           1.94%

    17          2038**      2.00%           1.98%

    18           2039**      2.00%           2.02%

    19           2040**      2.00%           2.06%

    20          2041**      2.00%           2.07%

    25          2046**       2.125%         2.23%

    30           2050**      2.25%           2.30%

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

    Source: Bloomberg

    This is an example of a new issue priced the week of 3/15/21

    Prices, yields and availability subject to change

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