Posts Tagged ‘Bond Crash of 2018’

Slow Moving Bear

October 9th, 2018 by Kurt L. Smith

Having a plan and executing it can be worthwhile in a market in which yields on almost all bonds are rising and their prices are falling. Three quarters into 2018 and yields are up and prices are down on almost all kinds of bonds and across all maturities.

Take a look at this month’s featured municipal bond issue, Eagle Pass, TX, below, and compare it to January’s yields. Yields are higher across all maturities, from short-term to long-term, of at least one half of one percent. Higher yields mean lower bond prices but yet that message is not is not making a huge dent in performance. The reason is speed. Yes, interest rates are up but the speed of change has not had an appreciable negative effect on bond market performance.

Looking at municipal bond indexes we see this. The S&P Municipal Bond Index is essentially unchanged from January 1^st. Same for the Bloomberg Barclays Municipal Intermediate to Short Total Return Index or their US Municipal Bond Index for that matter (all per Bloomberg). Check your favorite yardstick and compare. The reason this is so is because the interest earned so far has been keeping up with principal (price) loss. (more…)

Never Sexy

September 6th, 2018 by Kurt L. Smith

Another month, another summer. I hope your summer was worthwhile, mine certainly was. Usually things run slower during the summer months and again that was true in our little corner of the market. Yet, despite no one quite knowing how municipal bonds “work”, they continue to do so. For us anyway.

While some stock indexes hit new all-time highs last month, that doesn’t equate to much change at all over the past six months. Some say the same thing about municipal bonds, even the ones I’ve found for them, but these folks are thinking short-term. I don’t deal in the latest, shiniest object. Nothing sexy here.

Cash and cash alternatives are rarely sexy. Yet this is the asset class which I believe is rising in prominence and will continue to do so over the next number of years. It is also an area of expertise that not many people possess.

Anyone can buy treasury bills, short-term notes and bonds and call it cash alternatives. Do it for as long as you want, then let’s compare your returns. Oh, you’ve come up with a new way to skin a cat…. again let’s compare returns. (more…)

Depths of Summer

August 6th, 2018 by Kurt L. Smith

Heady days and bond markets rarely go together. Nor do the terms ‘bond market’ and ‘news’. Add summer and vacations into the mix and the bond market becomes French. Absent.

I may exaggerate but not much. Thankfully we are not looking to keep up (or primarily down) with any bond index, we are not burdened by scale or the inability to find worthwhile bonds. Every day I get to practice and build my skills and every day things come together. Except in the summer, things come a bit more slowly.

Last month I discussed how the markets are poised for a fall. One more month without the Bond Crash of 2018, but the first of August brought ten year US Treasury note yields back to 3% for the first time in several months. Most of 2018 has so far been a correction of the dramatically higher yields (and double-digit price losses of longer bonds). Whether we begin the next phase of higher rates and lower prices immediately or whether it takes a few more months, is not important. What is important is you are prepared and you are prepared because you own the proper asset, chosen by The Select Approach^TM. (more…)

The End of Slow

July 6th, 2018 by Kurt L. Smith

Halfway through the year and still no Bond Crash of 2018. Despite the double-digit losses in the longer US Treasury market discussed last month, the sell-off is orderly. With a recent temporary pause (treasury bond prices have bounced the past six weeks), the set up remains quite ripe for the Bond Crash of 2018.

Stocks are doing their part as well. Take a look at the Dow over the first six months of the year. A sharp rise into January’s record highs only to swoon into February’s dive. Given ample opportunity for investors to buy this year’s dip, the Dow has instead delivered how a bear market behaves. Gapping down, filling gaps, falling further and partial retracements of late…these are bearish descriptions of the Dow over the past weeks.

We are left with a bond market bear that began in 2012 and the beginning of one for stocks. This, despite record profits, surging growth, tax cuts and off the chart optimism in just about every metric out there. The market doesn’t care; the market is a market.

The importance of these paragraphs are not because they portend change, a change we can all ride out together. No. These paragraphs and my years of harping on this subject is because the changes will be generational, unfathomable changes. (more…)

Shot Across The Bow

March 1st, 2018 by Kurt L. Smith

While bonds continued their slow, steady march to higher yields (and lower prices), the stock market corrected. One thousand Dow points lost in just over an hour. Stock indexes swooned, even falling below the levels I marked in my November Letter as the Top of Tops.

I am sure you didn’t sell in November, just as I am sure you didn’t sell 3,000 points higher at 26,500 in January. You are not conditioned to sell; you are conditioned to buy the dips. We have enjoyed thirty-plus years of bull market reinforcement, not to mention every bit of economic, scholarly and sage advice written to further reinforce stocks for the long run.

Last month’s letter predicts the bond crash of 2018. Despite the stock market’s gyrations of late, the bond market neither soared or crashed. The bond market continues to deteriorate, yet at a seemingly glacial pace over the past several months. Ten year US Treasury notes were 2.01% on September 2^nd and touched 2.95% in February (Bloomberg) while activity in municipal bond markets remain somewhat muted. Overall, new higher yields for US Treasury notes and bonds, furthering the bond bear market but no crash, yet. (more…)

The Bond Crash of 2018

February 1st, 2018 by Kurt L. Smith

Another month of higher interest rates continues the upward trend since my call back in June that interest rates are moving higher. A slow slog, yes, but bond prices are slowly sinking. The market continues to chip away at the general consensus of “lower rates longer”.

This is the story of how a gargantuan bond market turns.

Over the course of the thirty-plus year bond bull market no discussion of bonds could be had without mention of inflation. As inflation heated up throughout the 1970s and peaked in 1980, bond prices collapsed…until they collapsed their last. Inflation figures began to decline as well. As double-digit inflation figures became a thing of the past, the bond bull market began to gallop.

Bonds and inflation are believed to be inexorably linked. When asked whether there is risk of even higher interest rates today, most investment professionals will answer no adding that inflation is benign. Ask them why rates are up dramatically in the past few months and again, most would probably say that there has been a slight uptick in inflation.

As inflation goes, so goes interest rates. Or is it, as interest rates go, so goes inflation. One way or another, the general assumption is that interest rates and inflation are correlated. (more…)

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