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Posts Tagged ‘bond bear market’

Talk, Talk, Talk

September 3rd, 2026 by Kurt L. Smith

We have not seen this many articles about Bonds in a very long
time. We have a new Federal Reserve, Chairman Kevin Warsh,
and investors want to know what to expect. I suggest you do
something a little more productive, like enjoy a blowout weekend
to celebrate one of the longest unofficial summer seasons in
recent memory.


Bonds are on their way to becoming a four-letter word, but there
is a long, long way to go. Bond salesman, chiefly the new Federal
Reserve chairman, dealer bank chief economists, and anyone
who manages bonds for a living, will tell you now is a great time to
invest in bonds. Shocking!


The experts used to tell us how great an investment in bonds has
been (performance-wise) along with the compliance tagline “past
performance is no guarantee of future results.” Now that
performance figures are, well, lacking, we are told to “look at that
yield!”


Performance is an important metric, which makes investing in a
bond bear market a very difficult proposition. Of course, this
brings up the issue for some as to whether we are in a bear
market or if we are still a bull market. I remember the 1980s when
double digit interest rates peaked and interest rates fell to 7% in
1986, my first year in bonds. Shortly afterwards in 1987 they
climbed again to double digits. Was it still a bear market in
bonds? No! All of this to say it took some investors almost ten
years to finally figure out we were in a bond (and stock) bull
market.


We are already six-plus years into the new bond bear market.
You are fortunate that you invest in municipal bonds because
municipal bonds may provide opportunities in a bond bear market
that US treasury bonds, corporate bonds, and mortgage may not
provide. The reason is diversity; no other market comes close.


Remember “lower for longer?” I believe a former Federal Reserve
Chairman touted that. Was he prepared for inflation that certainly
would result from a surging money supply response to the COVID
pandemic? Talk about lack of credibility. Yes, do something
productive with your time and celebrate the end of summer or
focus on your stock portfolio.


The market will do what the market will do, but in general, the
market can trend. With interest rates moving up from near zero in
2020, a downward correction in rates from 2023 through early
2026, we are now entering the meat of the trend. It is why interest
rates in the thirty-year bellwether treasury hit post-2007 highs in
yield last month and why the two-year treasury note and ten-year
treasury note closed last week within a couple of basis points of
their twelve-month highs, certainly within striking distance of their
own multi-year highs.


Bonds can be a great tool in your portfolio. But if you do not see
maturity dates on your bonds (or bond products) or those dates
seem to be beyond your comprehension, you might want rethink
your bond portfolio. And if your portfolio includes US treasuries,
corporate bonds, or mortgages, you might want to consider what I
believe to be a worthwhile alternative in municipal bonds (both
tax-free and taxable).


Now may be a good time to review your commitment to the
bonds. Performance figures have been poor and the trend
remains challenging. Let’s talk.


Arlington Independent School District, TX
Unlimited Tax School Building Bonds, Series 2026
Aaa Moody (Permanent School Fund Guarantee) Aa1
(Underlying) AAA S&P (PSF) AA Underlying
Due 2/15 Dated 9/15/26 Maturity 2/15/51
$125,000,000 Sold


Years Maturity Coupon Yield*

1 2027 5.00% 2.61%

2 2028 5.00% 2.67%

3 2029 5.00% 2.77%

4 2030 5.00% 2.89%

5 2031 5.00% 3.00%

6 2032 5.00% 3.08%

7 2033 5.00% 3.23%

8 2034 5.00% 3.35%

9 2035 5.00% 3.47%

10 2036 5.00% 3.58%

11 2037** 5.00% 3.72%

12 2038** 5.00% 3.84%

13 2039** 5.00% 3.93%

14 2040** 5.25% 4.02%

15 2041** 5.25% 4.10%

16 2042** 5.25% 4.16%

17 2043** 5.25% 4.21%

18 2044** 5.25% 4.26%

19 2045** 5.00% 4.37%

20 2046** 5.00% 4.44%

21 2047** 5.00% 4.53%

22 2048** 5.00% 4.59%

23 2049** 5.00% 4.63%

24 2050** 5.00% 4.68%

25 2051** 5.00% 4.70%

*Yield to Worst (Call or Maturity) **Callable 2/15/36
Source: Bloomberg
This is an example of a new issue priced the week of 8/24/26.


Provided for illustrative purposes only and is not a
recommendation to buy or sell any specific investment.


This commentary is for informational purposes only and does not
constitute investment advice or a recommendation to buy or sell
any security. Past performance is not indicative of future results.
All investments involve risk, including the possible loss of
principal. 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. Index data is provided for illustrative
purposes only.

Bond Bear Market Enters Next Phase

August 6th, 2026 by Kurt L. Smith

I have been looking for higher interest rates since my Early Stages letter March 10th along with the follow up Wild Swing letter April 6th. The market has delivered. Across all maturities of U.S. Treasury securities, rates have jumped, bond prices have fallen, and performance figures for treasury investors renewed their downward slide.

Yet despite the rise in treasury yields, I did not believe they indicated the Federal Reserve should or would raise interest rates last week, even a small 25 basis points. So, guess the result? In my view, faced with an opportunity to lead (cut rates) or follow (like decades of Federal Reserve policy before him), new Chairman of the Federal Reserve Kevin Warsh chose to follow.

Traditional wisdom holds that the Federal Reserve can influence short-term rates, but it is the market that determines longer-term rates. At least the traditional wisdom is half right; In my view, the market controls all rates, and the Federal Reserve follows closely so not to lose what credibility it has.

In my opinion, the Federal Reserve’s credibility suffered greatly last week. With inflation running over the Federal Reserve’s target 2% rate for the past five years, treasury investors appear to be demanding more yield to compensate. But even with interest rates on ten-year and thirty-year treasuries trading near or at twenty-year highs, the question of how high inflation can run or how high is high for interest rates remains.

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Treasury Prices Weaken, Municipals Yawn

July 16th, 2026 by Kurt L. Smith

The above headline is typical for municipal bonds. Today the two-year US Treasury note traded at 4.28% while the NR/AAA/NR rated Alamo Heights, TX bonds detailed below were priced today at 2.60% or 61% of treasuries. Depending on your tax situation, you may need to be in a relatively high tax bracket for new issue municipals to be worthwhile compared to taxable alternatives.

Expanding to the global universe of treasuries and municipals you would think they lived on different planets. US Treasury Bond performance as tracked by the Bloomberg Treasury Index has a 2.69% one-year performance while Bloomberg’s Municipal Bond Index sports a 6.52% performance for the same period. Over the past five years the outperformance has also appeared otherworldly with the Treasury Index losing 3.7% for the period and the Municipal Bond Index up 5.38%, though on an annualized basis that is a slightly negative annual Treasury performance versus up 1.05% annually for the Municipal performance.

If investors, or more likely investment managers, continue to buy municipals at or near 61% of treasuries, municipal bond outperformance could continue. But that is not how we approach municipal bonds over time. Taking a longer perspective, bond performance across both assets tends to look alike because interest rates are interest rates, reflecting the costs of borrowing with treasury yields primarily serving as the base case.

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Going, Going, …

May 14th, 2026 by Kurt L. Smith

It is early in the baseball season, but the extreme optimism generally associated with Opening Day Baseball continues to be reflected in the financial markets. This is not especially new for the stock market, where elevated valuations have existed for so long that many investors appear accustomed to them.

Optimism has continued in bonds as well. March, one of the worst months for municipal bonds in recent years, was followed by a solid rebound in April. Demand for tax-exempt bonds has remained strong despite t continued issuance.

That has not necessarily been the case for US treasury securities. It is the bellwether bonds of the US treasury that are trying to cast a pall over the party. Today the ten-year treasury yield closed at 4.46%, a level not seen since last July. Similarly, the two-year treasury yield closed at 3.99%, a level not seen since last June. This has occurred despite the three Federal Reserve quarter rate cuts in September, October, and December of last year.

Many fixed income investors view higher yields as an attractive entry point. Their argument is that, for the better part of three years, the ten-year treasury yield has generally traded within a range of approximately 4% to 4.5% for the ten-year treasury. Therefore, all is normal, and at 4.46%.. From that perspective, current levels may appear consistent with the broader range that markets have experienced in recent years.

Taking the broader view, we have watched the ten-year Treasury yield move from .31% in March 2020 to 5.02% on October 23, 2023. After such a dramatic move higher, one might have expected interest rates to pull back over the following two or three years. Somehow 3.60% on September 17, 2024, just does not seem to be inspiring. Over the past year the ten-year Treasury yield tried to move to lower territory: 3.85% on April 4, 2025, 3.93% on October 17th, and 3.92% just a few weeks ago on March 2nd. Here we are at 4.46%…three strikes you’re out!?

There are tens of trillions of dollars invested in fixed income markets. Market trends and interest rate movements can have a meaningful impact on bond performance, particularly during periods of rising yields. Treasury returns over the past five years were negative at -1.30% per Bloomberg Treasury Index. Your coupons delivered some return, totaling 11.48%, but your price declined 13.29%. Just think about that. Over five years this is the math that is affecting fixed income investors.

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Early Stages

March 10th, 2026 by Kurt L. Smith

Last month I asked, “How About a Little Volatility?” Bonds, which reach one of their lowest volatility levels in over four years on January 26th, experienced a noticeable increase. It was the largest rise in bond market volatility since the beginning of spring last year.

Why does rising volatility matter? In my experience, periods of increased volatility can sometimes create additional opportunities in the municipal bond market. One way to think about it is similar to shaking a pecan tree; more shaking can sometimes produce more.

Another potential sign of change may be developing in the two-year US treasury note. After trading near historically low yields of approximately 0.10% on February 11, 2021, five years ago, the two-year yield peaked at 5.25% on October 19, 2023. Since then, yields declined (prices increased) for a period of more than two years, reaching 3.36% on March 2nd before moving back up to 3.63% this week.

Viewed over a longer time horizon, the trend of the two-year notes increased from approximately 0.10% to 5.25% before experiencing a multi-year pullback to around 3.36%. If so, this could portend higher short-term interest rates for the future as the trend reasserts itself and yields move to newer highs.

The two-year tax-exempt municipal yield has shown a broadly similar look to the two-year treasury note, going from approximately .03% on August 4, 2021, to 3.75% about two years later October 23, 2023. The index was 2.00% two years later on September 17, 2025, and 2.01% last week before rising with treasury yields to approximately 2.14%.

Comparatively, the 2.14% tax-exempt yield represents roughly 60% of the 3.55% on the two-year US treasury note. Depending on an investor’s tax bracket, time horizon, and investment objectives, one could wonder who finds 2.14% tax free for two years attractive. I sure do not, but demand from investors for municipal securities has generally remained steady, keeping spreads on municipal bonds tight compared to treasury yields.

We continue to find many worthwhile municipals compared to new issues (below) as well as the indices, yet we are cautious, and hopeful, that yields rise across the board from here. Setting the trend, correcting the trend, with both taking two years or so, appears to look complete. Yields on treasury notes and bonds as well as municipal bonds should move higher from here.

Higher yields can create headwinds for municipal bond mutual funds as well as managed products, particularly those that have benefited recently by adding duration by buying longer term bonds. As we have talked about these past couple of years, bond portfolio performance has been lousy since the end of the bond bull market in 2020, though the correction of the past two years has made recent returns somewhat tolerable. Mutual fund and managed fund performance could change dramatically if, as I expect, interest rates are now beginning their climb towards new higher yield territory.

The world is full of risks and investors have largely enjoyed the ability to ignore them. After setting the trend towards lower bond prices and higher yields, I believe the bond market is now poised to set new lows in price as yields work towards new highs.

Recent New Issue Example

Sheldon Independent School District Bonds

Series 2026

Aa3 Underlying Moody Aaa PSF Guaranteed

Due 2/15 Dated 4/1/26 Maturity 2/15/54

$58,815,000 Sold

Years Maturity Coupon Yield*

1 2027 7.00% 2.32%

2 2028 7.00% 2.33%

3 2029 7.00% 2.37%

4 2030 7.00% 2.40%

5 2031 7.00% 2.45%

6 2032 7.00% 2.53%

7 2033 7.00% 2.62%

8 2034 5.00% 2.69%

9 2035** 5.00% 2.79%

10 2036** 5.00% 2.88%

11 2037** 5.00% 3.00%

12 2038** 5.00% 3.13%

13 2039** 5.00% 3.25%

14 2040** 5.00% 3.34%

15 2041** 5.00% 3.44%

16 2042** 5.00% 3.57%

17 2043** 5.00% 3.72%

18 2044** 5.00% 3.87%

19 2045** 5.00% 4.03%

20 2046** 5.00% 4.18%

21 2047** 5.00% 4.27%

22 2048** 5.00% 4.33%

23 2049** 5.00% 4.36%

26 2052** 5.00% 4.44%

30 2056** 4.50% 4.50%

*Yield to Worst (Call or Maturity) **Callable 2/15/34

Source: Bloomberg

This is an example of a new issue priced the week of 3/2/26. Provided for illustrative purposes only and is not a recommendation to buy or sell any specific investment.

This commentary is for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any security. The views expressed are those of the author as of the date of publication and are subject to change without notice. Market conditions and economic developments may cause actual results to differ materially from those discussed. Past performance is not indicative of future results. All investments involve risk, including the possible loss of principal. 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. Index data is provided for illustrative purposes only.

Exuberant Optimism

January 9th, 2026 by Kurt L. Smith

The financial markets continue to reflect a high level of optimism. Stocks had good performance in 2025 and developments in artificial intelligence is on fire. There is so much optimism in financial markets that it even bleeds into the bond markets.

Many investors seem to be content with their portfolio and very few seem to be making, or willing to make, a meaningful change in their portfolio mix. The one message that seems to resonate with me is this: stay the course.

This is the message that a lack of pain delivers. Bumps in the road have been merely that; bumps in the road. The last umpteen years have been a financial planner’s dream. As a result, many long-term financial plans remain on track. However, it is important to review portfolio components individually rather than relying solely on overall results.

This is not what bond performance figures tell us. When examined independently, bond performance has been more modest compared to stocks. Looking at the municipal bond market, the Bloomberg Municipal Bond Index reports the following compounded returns: 4.25% for one year, 2.63% for two years, 3.87% for three years, 0.80% for five years, and 2.34% for ten years. Index performance does not reflect the deduction of fees, expenses, or taxes, and investors cannot invest directly in an index. Actual investor results may vary, particularly in separately managed accounts (SMAs) or mutual funds where expenses apply.

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Interest Rate Cut Coming Wednesday

December 9th, 2025 by Kurt L. Smith

Short term U.S. Treasury yields continue to fall paving the way for another twenty-five basis point interest rate cut by the Federal Reserve at this week’s December 10 meeting. the six-month treasury bill fell from 5.59% August 29, 2023, to a new low of 3.68% last week, taking money market yields lower as well.

In a report issued by Crane Data on December 3, money market mutual fund assets recently broke the $8 trillion level for the first time, up from $6 trillion in August 2023 and $4 trillion in 2020, the COVID year. Cash may not be king, but these levels dwarf the $4 trillion-plus municipal bond market.

Obviously, investors of cash are willing to accept less returns as rates on short term securities and money market mutual funds have decreased since the Federal Reserve began cutting interest rates from 5.50% in September 2024 to perhaps 3.75% Wednesday. But unlike their long-term bond brethren, lower rates on money markets do not equate to higher prices and better performance. Lower rates on money markets merely gets you less: lower yields earn you less return.

This explains why longer-term bonds continue to be a high buzz asset class. Best to lock in these higher yields on longer bonds before they too shrivel like money market yields. We have only one month left in 2025 and if longer term interest rates can just hold in there, then purveyors of bonds will have 2025 performance figures to hawk further into 2026.

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The End of a Move?

September 8th, 2025 by Kurt L. Smith

Sideways market movements can often seem perplexing. Just when you think interest rates should move one way, they meander the other; seemingly for months on end.

Welcome to the summer of 2025. Four months of longer-term U.S. Treasury yields ending little changed. The volatility of April saw interest rates plunge, then jump to even higher rates in May. Here we are at the end of unofficial summer after Labor Day with interest rates working their way back down to…normal?

This is how the bond markets act like a market. Several steps forward, one back. We have been here before: from the interest rate highs of October 2023 to a low in September 2024 I wrote often about the frustrations of a market in a correction.

The part of the bond market I care most about is the longer bonds. On this day before the monthly employment numbers are released (yes, by the Bureau of Labor Statistics), the thirty-year bellwether treasury trades at 4.88% (all prices and yields per Bloomberg). This yield is 94% of the 5.18% high back on October 23, 2023, and is much higher than 3.89% correction low on September 17, 2024. The trend for long term interest rates remains higher as I have said since March 2020 and the long end of the market is the place to see that most clearly.

Short-term interest rates, indicated by the six-month treasury bill, show a different picture. Today’s 3.96% yield sits on top of the spike low of 3.92% on April 7, 2025, during the height of April’s volatility and is down substantially from the 5.59% high of August 29, 2023. This summer’s plunge of yield on the six-month treasury bill puts the odds of a Federal Reserve rate cut of 25 basis points on September 17th at 95%, again per Bloomberg.

The Federal Reserve is a follower in my book, a follower of the six-month bill. Usually, employment data confirms the recent direction of interest rates so it would not surprise me if short term yields continued lower and the Federal Reserve comes through on September 17th with this first rate cut since December 18, 2024.

Unfortunately, it is those with cash in money market funds and other short-term instruments like treasury bills that have seen the effects of lower yields. These are generally not the moves you want to see as a holder of cash: a diminishing of your income.

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Municipal Performance Lags

August 4th, 2025 by Kurt L. Smith

What else is new? According to Bloomberg the municipal bond market is “logging its worst performance relative to US government debt since the start of the pandemic.” Municipals have lost 1% so far this year, trailing the 3% gain on US treasuries by about four percentage points.

Municipal bond pundits love to talk about supply and demand in the new issue market.  but over the long term, we believe that supply and demand should even out. As we have talked about for years, performance is determined not by owning the market, but by selecting your municipals with performance in mind.

We are in a bear market for bonds, and this means you have the wind in your face instead of at your back. Rising interest rates subtract from performance. Prior to the end of the bull market, falling interest rates gave a capital gain performance boost to portfolios. This trend change, in March 2020, makes performance figures in bonds look quite puny ever since.

For example, as of August 1, 2025, Vanguard Long-Term Tax-Exempt Fund Admiral Shares (VWLUX) reported total returns of -1.77%, +1.63%, and +0.18% for the one-, three-, and five-year periods, respectively (Source: Bloomberg).  You can pick your favorite municipal bond vehicle and it, unfortunately, will probably look fairly similar.

Similarity in the municipal market appears to be the rule in our four trillion-dollar market. Yes, managing assets is a matter of scale, as it appears most of the participants hold similar bonds. How else can I describe similar performance figures?

Owning the market has its advantages, particularly in a bull market. Owning seven stocks has its advantages as well, if they are THE seven stocks and the market continues as a bull. But owning the market in municipal bonds may not serve you as well as selecting your municipal bonds may serve you. Look at your statement over the past one-, three- and five-year periods or even longer.

In my opinion, the bear market for bonds is not complete. The asset gathering of Wall Street firms continues in municipals and watch any of their commercials; they are not selling the idea of buying in a bear market. Hard to fathom a bond market where our bellwether bond, the US Treasury 1.25% 5/15/2050 traded at over 100 in 2020 and consistently in the 50s or below for almost three years now, is worthwhile. Somebody, or something, owns that bond and hopefully it is not you. Have municipal bonds fared better than that bellwether? Perhaps, but who wants them; it is an indictment on owning long-term bonds in a bear market.

There are much better ways to keep your money safe and earn a worthwhile return at the same time. Individual municipal bonds are the key in a bond bear market. Individual bonds have maturity dates, unlike the mutual funds and exchange traded funds that are marketed however they are marketed. A maturity date is key; it was key to avoiding 5/15/2050 (then and now).

Since April 2025’s dramatic sell-off in bonds, interest rates have been trading in a range. How long this will continue, I do not know. But I do believe the trend is for higher interest rates despite seemingly everyone else continuing to invest in the municipal market, and its pathetic performance returns, hoping for better. The trend is not their friend, but it is ours.

Let me show you how The Select ApproachTM could work for you. For example, the Georgetown ISD bonds (below) is indicative of the general market. Look at those yields, below 3%, even before Friday’s rally (8/1/2025). We have options for short-term tax-exempt bonds; I suggest you consider them. We continue to find worthwhile bonds and I look forward to hearing from you.

Georgetown Independent School District, Texas

Unlimited Tax School Building and Refunding Bonds, Series 2025

Aa2 Moody Underlying AA Underlying S&P

Aaa Moody and AAA S&P on Permanent School Fund Guarantee

Due 2/15   Dated 8/26/25 Maturity 2/15/55

$334,005,000 Sold

Years   Maturity       Coupon        Yield*

1         2026             5.00%           2.52%

2         2027             5.00%           2.54%

3         2028             5.00%           2.57%

4         2029             5.00%           2.61%

5         2030             5.00%           2.75%

6         2031             5.00%           2.97%

7         2032             5.00%           3.10%

8         2033             5.00%          3.27%

9         2034             5.00%          3.38%

10       2035             5.00%          3.57%

11       2036**          5.50%          3.71%

12       2037**          5.50%          3.89%

13       2038**          5.50%          4.00%

14       2039**          5.00%          4.20%

15       2040**          5.00%          4.31%

16       2041**          5.00%          4.40%

17       2042**          5.00%          4.52%

18       2043**          5.00%          4.64%

19       2044**          5.00%          4.69%

20       2045**          5.00%          4.73%

21       2046**         5.25%          4.76%

22       2047**          5.25%          4.81%

23       2048**          5.25%          4.84%

24       2049**          5.25%          4.87%

25       2050**          5.25%          4.87%

30       2055**          5.25%          4.90%

*Yield to Worst (Call or Maturity) **Callable 2/15/35

Source: Bloomberg

This is an example of a new issue priced the week of 7/28/25. 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.

Optimism Continues

July 1st, 2025 by Kurt L. Smith

The year is half over, and I hope you have enjoyed every minute of it. Financially speaking, the markets have not done much of anything, which has aligns well with our investment strategy. You continued to earn worthwhile tax-free returns and we’ve identified several new opportunities over the past six months.

As we close out the first half of the year, both equities and fixed income show signs of strength. Stocks have bounced up nicely, while bond prices have only edged slightly higher over the past six weeks, resulting in slightly lower yields. For example, look at the Katy ISD bonds below compared to last month’s Fort Bend County Toll Road. Last month there were no maturities below 3%; this month the first six years are below 3%. Longer term yields move relatively little (not much optimism out there), so perhaps more bond investors have turned skittish and prefer short-term over long-term, or they are just more optimistic on short-term bonds.

Meanwhile, stocks continue to perform in their own world, with bonds seemingly benefitting slightly from their buoyancy. Such optimism and bounce up in stock prices should make the first half performance figures look strong. If we could weather the storm that was back in April, just think where we can go from here. Isn’t optimism contagious?

You are familiar with this ebb and flow of markets because that is what you are investing in: a market. We know as bondholders that performance does not always move up and to the right. But that is the hope/belief/reality for those investing in stocks. On the other hand, bondholders, particularly those who believed long-term bonds were not a part of a market, have seen their performance struggle for years.

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NEWS FEED

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