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Posts Tagged ‘bond bear market’

More of the Same

January 31st, 2022 by Kurt L. Smith

No, I did not delay writing this letter until we heard from the Federal Reserve on Wednesday afternoon. When was the last time the Fed surprised? Indeed, this Federal Reserve chair, Jerome Powell, is more of the same.

In the mold of the maestro, Alan Greenspan, Powell serves up optimism with the confidence that the Federal Reserve has “our tools and we will use them” to get the job done. Not only does he have the tools, but he also has experience using them. Whereas former Fed chair Bernanke questioned whether he had the authority to act and act boldly, Chair Powell suffers no such hesitation. He has already been there and done that.

Chair Powell has decisions to make. Inflation is the worst in 40 years, interest rates are rising without his involvement and the Federal Reserve balance sheet now stands at $9 trillion ($8.867TR, per Bloomberg). Thankfully everyone is working…everyone that hasn’t retired, quit, or been sidelined by COVID

This past month things are beginning to break down. Our beloved bond market, the one I continue to shoo you away from, continues to deteriorate. One should not own bond mutual funds which has been my stance for almost two years now. Benchmark yields such as the two-year US treasury note or the ten year note have risen substantially, yet Fed Chair Powell continues to wait.

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Streaks End

November 30th, 2021 by Kurt L. Smith

Streaks don’t last forever. This past weekend in college football proved that. The college football playoffs this year will not include Clemson, Ohio State or Oklahoma. Despite all reason, the best talent, and the fact we all love winners, the playoff runs for these schools has ended. Only Alabama’s hope remains. 

Time will tell whether this is but a minor setback for these perennial powerhouses or one of long-lasting stature. I know the differences. I am a (now) long suffering Texas Longhorn fan. 

I also called the end of the bond bull market as March 6, 2000. An almost forty-year winning streak for the bond market is now over, yet many do not share my certitude, even after twenty-one ridiculously long months. 

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Correction Over Reexamined

October 27th, 2021 by Kurt L. Smith

No, I am not referring to recent stock market activity, but hopefully I got your attention. Since July’s letter “Correction Over” bonds have performed poorly, as expected. While the bond market’s poor performance has yet to rub off on other markets, it would be a mistake to ignore what is unfolding.

Interest rates are rising and not just a little. I continue to watch the bellwether US Treasury bond, the 2.375% of November 15, 2049, which traded at 113 back in July when I wrote “Correction Over” (yields and prices per Bloomberg). This past week the bond traded at 105 for an 8-point loss over three months.

The ten-year US Treasury note, the 1 ½% February 15, 2030, traded at 103.75 (1.04%) in July and 99.25 (1.60%) last week for a 4.5-point loss. But it was the five-year US Treasury note, the .25% of August 31, 2025, which really moved from .63% in July to a doubling to 1.25% last week. Those five-year treasuries traded over 100 in September 2020 and last week traded at 97 (1.04%). Originally buyers of this short, five-year note, have seen twelve years of income in market value evaporate over the past fifteen months. Thank goodness the note will mature at par, though in 2025!

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Low Rates Are Not Enough

September 27th, 2021 by Kurt L. Smith

For almost forty years interest rates have moved lower and for many of us we will forever regard today’s rates as low. This is nothing new. We have lived in a low interest rate environment now for many years.

Not content with relying solely on the economic drivers of low interest rates, the Federal Reserve has, at various times these past many years, decided it also needed to buy bonds. Evidently low rates are not enough.

Buying bonds might spur you or your brethren to also buy bonds. After all, bond prices can move upward just like other asset prices and in 2020 the prices for US Treasury notes and bonds soared.

Despite continued Federal Reserve bond buying, US Treasury notes and bonds climaxed in 2020. Investors know that down forty percent in price represents quite a climax. What happened Fed? Why aren’t investors continuing to buy US Treasury notes and bonds and following your lead?

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What Is An Investor To Do?

August 24th, 2021 by Kurt L. Smith

For forty years you have known the answer to this question. You buy and you buy more. Hindsight is wonderful and it also can give you great confidence. Stay the course, invest with us…turn on the television and follow the financial ads. So easy.

Except the world changed eighteen months ago. Not the pandemic; the bond market top-ticked almost forty years of a bull market. As a reader of this letter, you know the bellwether US treasury bond had a final run-up of forty points and then lost all of that. The bond bull market is over.

You may question, or continue to question, the relevance of such a situation. Obviously stock investors do not care, judging by the corresponding market move in stocks. But what is eighteen months in the scheme of things?  We are talking about your retirement or managing money (yours or others)?  These are long-term concerns. Besides, what if the run-up in stocks is merely the stock version of what we saw in bonds in 2020? What happens when stocks top-tick?  The status of the bond market is relevant, regardless of how or when it chooses to assert itself.

I do not need higher interest rates to find worthwhile bonds. I can do it in a low-to-no-interest rate environment as I have for the past ten-plus years. My interest in following the bond market, particularly the movement of US Treasury bellwether’s is because it matters.

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Correction Over!

July 28th, 2021 by Kurt L. Smith

Now that I have your attention, I hope I do not lose it by saying I am talking about long-term treasury prices. The March 2021 letter, Should We Be Traders? noted how the thirty-year bellwether treasury bond had lost all of its forty-point gain from the March 9, 2020, bond market top. The bond market moved from bull to bear, and I expect this bear to be a long one.

The bellwether bond we watch is the 2.375% of 11/15/49, trading at 141 on March 9, 2020 (all prices per Bloomberg, rounded for simplicity). The low since then was March 18, 2021, when it traded at 98. Over the past four months prices have bounced upward, trading at 113 last week on July 20th. This upward bounce in price is the correction that is now over.

When prices fall about 43 points over twelve months the expectation is for a bounce to occur, here about 15 points, over a shorter period. This price action also can be seen in yields, in the opposite direction, with yields rising from 1.00% in 2020 to 2.44% in March 2021 and back down to 1.82% last week.

Similar price/yield action has occurred in the ten-year treasury yield. The 1.50% of 2/15/30 traded at .31% on March 9, 2020, and 1.67% on March 31, 2021 and 1.04% last week on July 20th. Low to high then a bounce; this is the correction!

What does this mean? The idea of lower for longer (i.e., low interest rates) was shattered with a forty-plus point move and reversal. Interest rates have moved back down but this is not indicative of where interest rates “should be”, but rather a prelude to the next move which is to new interest rate highs (and price lows).

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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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