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Posts Tagged ‘bond bear market’

Why Municipal Bonds?

June 23rd, 2021 by Kurt L. Smith

The obvious answer to the question “Why municipals?” is they are tax-free. That is a good reason, especially if the benefit is greater than the alternatives. From the days of double-digit yields of the early 1980’s the added benefit of the tax-free feature has almost always been worthwhile to investors in the highest tax brackets.

Of course, an almost forty year bull market for bonds helps as well, but that is over. Bond performance no longer has the wind to its back; bond performance now faces many headwinds. Selection is key no matter the market, but in today’s new bond market, selection is paramount.

The final stages of the bond bull market have wreaked havoc with investment managers and their investor clients. Where is the yield and what has performed well in these final throes of the bull? You know it is junk, or high yield. For municipals this means prisons, nursing homes, dormitories and other housing or land-based, new projects. For corporates, well you can find lower rated credits across industries.

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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?

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Be Prepared

February 24th, 2021 by Kurt L. Smith

The past week has been a tragedy down here in Texas. One crisis morphed into another leaving dozens dead and tens of billions in destruction. Simply terrible and preventable.

As a Texas native, ridiculously cold weather for a ridiculously long (for us) time is not a once in a century experience. Every decade or so it happens. But Texans are not all native Texans now (or ever). Texas has been growing by transplants forever and their expectations eventually collide with a horrible reality.

A gardener prepares his garden in the winter. A homeowner prepares her pipes before they freeze. An investor prepares for the downturn as the market moves higher. There is time for celebration but there is also time for work, the preparation what comes next.

Last month we focused on the ten-year Treasury note and long bond. Friday, February 19th, those sold at new low prices (high yields). The long Treasury bonds has now lost 35 points in value from March 9, 2020 at 140.17+ to 105.05+ Friday (all prices from Bloomberg). One of the recently sold ten-year Treasury notes, the .625% of August 15, 2030, has now lost more in price that it ever promised to pay investors in interest over its ten-year life, trading at 93.6875.

These treasuries are, of course, the favorite investment for the Federal Reserve Bank. Their appetite for all treasury securities has grown on their balance sheet from about $2.5 trillion a year ago to $4.8 trillion now (per Bloomberg). All the while, their price continues to fall.

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Not Lower For Longer

May 7th, 2020 by Kurt L. Smith

Last month’s letter highlighted the opportunity available in managed fixed income funds. March 6th was a pivotal moment with record low US Treasury bond yields and historically low spreads for other bonds, such as municipals, that I believe fixed income fund performance may be negative for years to come.

The high prices for bonds on March 6th, I believe, are the bond corollary for the record highs in stock prices in February. The dramatic swoon down in prices in early March affected both asset classes. Diversification between the two offered little safety.

Now, approximately six weeks from the March lows, prices have bounced back strongly. Taking a long-term approach, both stocks and bonds remain near their record highs. Looking backwards, the patient investor appears to be sitting in a good place atop decades of bull market bond and stock performance.

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March 6th

March 30th, 2020 by Kurt L. Smith

I pray this letter finds you and your loved ones healthy. My prayers are with the first responders and the healthcare professionals on the front-line saving lives and protecting ours.

This is the most important letter I have ever written. My hope is you will pass it along to your loved ones and friends because I believe the message is very important.

I have spent my entire career, over thirty years focused on the bond markets. Long-time readers know I have been writing that the latest move in financial assets (stocks, bonds, gold) is the end of something, namely the end of their long-term bull markets. As tens of billions of dollars is now being poured into cash in the form of money market accounts, it appears some may agree, and they may be scared as well.

I know you have a choice with your money, and I appreciate your trust in me and my abilities especially in these volatile times. I believe it is important for you to more fully understand bonds as well as sharing this letter with others who may find it helpful.

In the United States, bonds account for about $33 trillion dollars in assets: US Treasury securities make up about $17 trillion, corporate bonds $10 trillion, mortgages $10 trillion and municipals $3.9 trillion (all courtesy of SIFMA.org). The Federal Reserve has recently increased its balance sheet to $5 trillion, primarily in US Treasuries and mortgages (courtesy federalreserve.gov) leaving a lot of bonds in other’s hands with the bulk either professionally managed including in mutual funds.

Mutual funds, with their quoted net asset values (NAV) and performance data available on the internet may appear to be similar as both can easily be reallocated with a point and a click.  Both have the same disclaimer: “Past success does not guarantee future performance.”  But they are as dissimilar as a stock is from a bond.

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High Demand for (Low) Yield

December 16th, 2019 by Kurt L. Smith

Long-time readers are well aware of my call to the end of the thirty-plus year bond bull market in 2012. That’s seven years now behind us. For long-term bonds this period has been quite a topping process (in 2012, 2016 and again in 2019) with the primary result being the tremendous issuance of new debt.

Treasury debt has exploded from $4.3 trillion in 2006 to $15.9 trillion in 2019 (Q2). My debt figures come from a wonderful website, www.sifma.org, check it out.  Luckily the Federal Reserve has been there as the primary buyer, expanding their balance sheet in various quantitative easing programs.

Right behind treasuries in debt expansion is corporate debt, rising from $4.9 in 2006 to $9.5 trillion (Q2). Federal Reserve Chairman Jerome Powell said in October that “leverage among corporations and other forms of business, private businesses, is historically high” –Bloomberg.

Indeed, not only are bond prices high (yields low) but there are more of them! As long as “lower-for-longer” holds, values should hold. Interest rates are low, so low it would appear that negative interest rates are a closer reality than higher interest rates.

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Sell Bonds

September 12th, 2019 by Kurt L. Smith

The Select ApproachTM believes the bond market correction of the past nine months is now over.

Last month we talked about the giddiness of bonds and that giddiness delivered bonds onto the front pages of the major dailies. The New York Times on August 28th probably marked the high prices with this headline “While Wall St. Talks of a Recession, Bond Investors Make a Killing. You should have bought bonds. They’re going great.”

The NY Times also included a nice chart of year to date returns. “Thirty year Treasury bond +26.4%, Long-term bonds +23.5%, Investment-grade corporates +14.1% and Ten Year Treasury notes +12.6%.” Indeed, stellar returns essentially describes the bond market correction of the past nine months.

In order to reap the rewards of this year’s bond market moves, one must sell. Not your Select ApproachTM bonds, but everything else. This market move was a trade, and a short-term one at that, and now it is over. The bond market is in a long-term bear market since 2012. Prices move down (yields rise) setting the trend and in order for the market to continue to lower prices, a correction needs to occur. Ebb and flow happens but the important part is the direction of the trend for bond prices is lower.

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The Topping Process Continues

August 8th, 2019 by Kurt L. Smith

The Dow Jones Industrial Average sold off almost 2,000 points in just a few days recently. The Dow now trades at the same level as it did back in January 2018.

Bonds meanwhile continue their move higher in price (lower in yield) as unlike stocks, their corrective move had added momentum. When it comes to bonds, we hear statements like highest prices (or lowest yields) since 2016. That’s because the current bond market rally is a correction of the downward price trend in bonds that dates back to 2016 (for me 2012).

Last month’s letter discussed how I expected asset prices of bonds, stocks and gold to soon complete. We have seen the initial move down for stocks and I look for similar strong downward moves to begin in bonds and gold at any time.

“At any time” is the operative word. Last month’s market focus was based on the movements of the asset markets over the past weeks as well as the past several years. Markets behave like markets, despite the actions of central bankers or presidents, war or peace. So last month’s giddy didn’t indicate a continuation of trend, but rather the end of a move.

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Correction Highs (And Lows)

July 11th, 2019 by Kurt L. Smith

For the past several months we’ve seen giddy up; now we are left only with giddy. Be it Stocks, Bonds, or even Gold, asset prices have generally had a nice 2019 bounce. To a large extent asset prices have peaked together. Unfortunately the rallies appear to be over, meaning lower prices from here.

How can that be? The news is great, prices are rallying and even the Federal Reserve appears poised to lower interest rates as yields have shriveled as US Treasury note and bond prices have jumped. The trend should be our friend and the trend is up, across the board for assets, right?

Wrong! The trend is not up. Despite nice gains for this year, assets are in the midst of finishing upward corrections. Gold, which peaked in September 2011 at $1921, bottomed in December 2015 at $1047 where it began a rally that may have recently ended at $1440 last month (all asset prices and dates per Bloomberg). While an additional advance may unfold, the next major move in my opinion is lower, to new lows rather than new highs.

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Bonds Are Markets Too

June 12th, 2019 by Kurt L. Smith

The bond market has been on quite a tear of late. With lower yields and higher prices, bond market articles have been on the front pages of The New York Times as well as other prominent articles in their business section.

Stocks on the other hand ended last month with their sixth consecutive down week. With bonds moving higher in price and stocks moving lower maybe there is something new going on. Perhaps your stock portfolio hasn’t been performing as it once did. Is something new happening?

From our vantage point, there is nothing new going on in the markets. The bond bear market began in 2012. Others may argue with me on this but that gives us a sense of how long a topping (or turning) pattern may take to develop or be fully recognized.

The bond (price) topping pattern or yield bottoming pattern has unfolded over many years already. Perhaps we will see something similar time-wise with stocks, but perhaps not. Perhaps the reason your stock portfolio isn’t performing the way you think it should is because we are in a similar topping pattern currently with stocks. If this is the case, which I believe, the key issue we need to address is one of risk versus reward.

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NEWS FEED

The $247 trillion global debt bomb washingtonpost.com/opinions/the-2…