Slow-Moving Trainwreck Over

Today, September 21^st marks the official end of the bond market correction that began last fall. Bloomberg’s US Generic Government thirty-year yield index hit 4.57% (all yield and prices per Bloomberg), the highest since 2011. Their ten-year index hit 4.50%, the highest since 2007. The two-year version of the index hit 5.20%, the highest since 2006, and within range of 5.35%, which would be the highest since 2000. The treasury market had been within spitting distance of this breakdown for weeks, as followed in previous letters.

The slow-moving portion of the financial markets, however, belongs to stocks, which are currently trading at the same levels as over two years ago (pick whichever index you like; the story is the same). The bullishness we have witnessed over the past many months has not resulted in higher prices, but instead lower ones. As the reality sets in that the correction in prices since last fall is slipping away (the slow-moving train wreck), expect the price plunge to accelerate as stocks join their highly correlated bond brethren in the continuation of the bear market.

Real economic damage has occurred already. My favorite bellwether US treasury bond, the 1.25% of May 15, 2050, traded at a new low of 48.5 today after trading over 102 three years ago on August 6, 2020. With treasuries of all maturities trading at twelve-plus-year lows, it appears that almost all bond portfolios are underwater, with those portfolios of longer duration significantly underwater. The last time long term bond prices were this low, last October, First Republic Bank, Silicon Valley Bank and Signature Bank collapsed months later. These were three of the four largest US bank collapses in history.

Some have argued these interest rates are simply a reversion to the mean. Yes, we have had 4.5% long term treasury yields as well as 5.5% yields on treasury bills, but we have never had them in a bond bear market following a tremendous increase in debt levels and a precipitous decline in bond prices.

Taking a look at SIFMA’s 2023 Fact Book, https://www.sifma.org/resources/research/fact-book/, global fixed income markets totaled $129.8 trillion in 2022. Back in 2008 the figure was $71 trillion. Looking only in the US, the figures were $52 trillion up from $28 trillion in 2008. The lion share of the increase, you guessed it, was US treasury debt, now at $24 trillion, up from $6 trillion, while corporate debt merely doubled to $10 trillion from $5 trillion. Municipal bonds outstanding now looks like a rounding difference at $4 trillion, up from $3.7 trillion in 2008.

Such numbers can make your head spin, but one can quickly see why municipals might be a better place to mine opportunities. Less leverage as a bondholder is preferred over more leverage. How much leverage is too much leverage? I know less leverage is better for bond buyers and I continue to find more municipal bonds with less leverage, an opportunity that does not exist in treasuries, or especially, corporate bonds.

We remain in a bull, bull, bull, world, though perhaps with one less bull today compared to a couple of months ago. I continue to see this as spreads of municipals to treasuries remain tight, in my opinion. Perhaps most people buying generic municipals have a huge tax burden (hard to believe). Comparing taxable municipals to treasuries shows the tight spreads easier and more ridiculous in my opinion.

Which is to say we are far from over in this bear market; we are only getting started when it comes to asset classes other than treasuries. Looking at stocks, the relative calm of the post bank failure bounce, I believe, should serve as a good gauge going forward. Watch the KBW Bank Index (BKX). Like many stock indexes, KBW hit its all-time high in early 2022 at 149. The October 2022 low (sound familiar?) was followed by a bounce into February 2023 to 116 before the bottom fell out again with the big three bank failures in March, bottoming at 70 in April. At today’s 80, it is lower than July’s 90, but if this index breaks down it portends big troubles. Banks own bonds, as well as loans, and neither is as liquid today as in the past. Being underwater, perhaps extremely underwater, is a huge problem. No matter how often analysts squawk about the abundance of bank capital, squawking does not make it so. It is liquidity that is lacking and that is a result of a three-plus-year bear market that is currently extending.

Your municipal bonds are unique. They can, and have, performed differently than other bonds. Not because they are municipal bonds, but because they are selected differently. This has been extremely important these past few years and it will continue to be the case, in my opinion, in the months to come.

Laredo, TX

Unlimited Tax School Building Bonds, Series 2023

Aa2 Moody’s (Under)      AA S&P (Under)

Combination Tax and Revenue

Due 2/15   Dated 9/15/23 Maturity 2/15/43

$56,220,000 Sold

Years   Maturity       Coupon        Yield*

1         2024             5.00%           3.61%

2         2025             5.00%           3.61%

3         2026             5.00%           3.53%

4         2027             5.00%           3.44%

5         2028             5.00%           3.40%

6         2029             5.00%           3.43%

7         2030             5.00%           3.46%

8         2031             5.00%           3.52%

9         2032             5.00%           3.59%

10         2033           5.00%           3.61%

11          2034**       5.00%           3.65%

12          2035**        5.00%           3.75%

13          2036**        5.00%           3.87%

14          2037**        5.00%           4.02%

15          2038**        5.00%           4.13%

16          2039**       4.00%           4.36%

17          2040**       4.00%           4.40%

18          2041**       4.125%         4.45%

19          2042**       4.125%         4.50%

20          2043**       4.25%           4.54%

*Yield to Worst (Call or Maturity) ** Call 2/15/33

Source: Bloomberg

This is an example of a new issue priced the week of 9/18/23

Prices, yields and availability subject to change