Something Is Changing

You are not reading this letter for advice on the stock market or crypto so obviously that is not what I am talking about with respect to change. The change I am talking about, of course, is regarding interest rates. On September 17, 2025, the Federal Reserve reduced the federal funds rate by 25 basis points cut on September 17^th as anticipated. Odds are currently high for another 25 basis point cut on October 29^th (94.6% odds of cut per Bloomberg as of October 7, 2025).

We have talked about short-term cash yields and how the trend there has been lower. But the low yields for the past six months occurred on or about September 17^th. On the short-term side, six-month US treasury bills bottomed at 3.75% on September 16^th and are basically flat since, hence the continued high odds for another rate cut at the end of this month.

Yields on longer term US treasury ten-year notes hit their six-month low on September 17^th, and just as I told you last month, yields have bounced higher since. This is early stage, but so far, the ten-year yield has done everything a change in trend needs. Look for higher yields on the ten-year note throughout year end and beyond.

Looking at municipals, we have the rare case of another bond issue from the same city as last month. Last month the City of Brownsville issued their best credit in a $142.2 million General Obligation issue. This month I feature an insured utility system revenue bond (below) with an A2/A-/NR underlying rating and NR/AA/NR on the AG insurance.

The first thing to notice is how many years it takes before one can buy a 3% tax free bond. Last month’s general obligation was eight years at 3.15%, the same for this month’s lesser credit with eight years at 3.11%. At the beginning of the year, new issues plus 3% from the get-go, but peaked at slightly over 4% on the long end of the curve. See the Caddo Basin Specialty Utility District featured in my January 6, 2025, letter.

Lower short-term rates and higher long-term rates are a poor combination for municipal bond investors. Indeed, The Bloomberg Municipal Bond Index is up only 2.89% year to date and only 1.84% over the past twelve months. This is even after a strong 2.3% return in September. What? This just goes to show how important long term bond performance is to overall return. The move of about 20 basis points in the long bonds (say the 2045 maturity) is the key September difference maker. Sadly, the performance of short-term bonds under five years does not carry much weight in how bond math works. Duration matters, and that is why longer bonds pose more risk in price change per interest rate change than short bonds.

Unlike the prevalent wisdom that the Federal Reserve cutting short term rates is responsible for September’s performance (it may be, or it may not), the key is always the trend and where we are headed. In this area of longer-term bonds, the change in trend of the ten-year US treasury note in September is much more meaningful to me than the end-of-trend performance jump in municipal bond performance.

You are not investing in municipal bonds for a sub 3% return. While we have seen a slightly lower shorter-term yield on one year and shorter bonds, we continue to find worthwhile bonds utilizing The Select Approach^TM. Selection is the key especially considering I believe we are at a trend change in bond yields (hence bond prices and bond performance as well).

We are three weeks away from the next Federal Reserve meeting. Whether the cut comes as currently predicted or not, time will tell. In the meantime, we will continue with our approach, The Select Approach^TM.

City of Brownsville, Texas

Utility System Revenue Refunding Bonds

Series 2025

A2 Moody Underlying A- Underlying S&P

NR/AA/NR on AG Insurance

Due 9/1   Dated 9/15/25 Maturity 9/1/55

$60,740,000 Sold

Years   Maturity       Coupon        Yield*

1         2026             5.00%           2.71%

2         2027             5.00%           2.65%

3         2028             5.00%           2.63%

4         2029             5.00%           2.67%

5         2030             5.00%           2.75%

6         2031             5.00%           2.84%

7         2032             5.00%           2.99%

8         2033             5.00%          3.11%

9         2034             5.00%          3.26%

10       2035             5.00%          3.41%

11       2036**          5.00%          3.57%

12       2037**          5.00%          3.71%

13       2038**          5.00%          3.86%

14       2039**          5.00%          3.98%

15       2040**          5.00%          4.10%

16       2041**          5.00%          4.22%

17       2042**          5.00%          4.33%

18       2043**          5.00%          4.42%

19       2044**          5.00%          4.48%

20       2045**          5.00%          4.55%

25       2050**         5.25%          4.69%

30       2055**          5.25%          4.74%

*Yield to Worst (Call or Maturity) **Callable 9/1/35

Source: Bloomberg

This is an example of a new issue priced the week of 9/29/25. 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. Yields and prices shown reflect market conditions as of the offering date and may not be currently available. Past performance is not indicative of future results.