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Posts Tagged ‘bond market performance’

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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Bears Out The Problem

March 9th, 2025 by Kurt L. Smith

Trend reversals take time with long term trends taking a long time to reverse. Throughout the multi-decade stock and bond bull markets we were used to trend reversals. By the time a downward trend was recognized, the odds were the correction was nearing its end and prices began to rise again. You might know this as buying the dips. It worked well for both stocks and bonds following the corrections of 2000, 2008 and 2020. But bonds failed to continue their bull ways while stocks went on to set new highs since then.

Bonds reversed trend in March 2020 almost five years to the day. We have entered a bond bear market, and you know it largely because I remind you every so often. Investors bought bonds on the dip in 2020, including you. Other investors invest in the bond market. Here at The Select ApproachTM, we rely on individual bonds to perform differently from the market.

Rather than selling one’s bonds in 2020 investors continued to buy because they were accustomed to buying dips. Even when the bond market failed to reach new highs in price, investors seemed pleased to buy cheaper bonds at yields much higher than in 2020. Buy more in a bear market? That is the power of Wall Street. That is the power of optimism. That is the power of not knowing the power of a bear market.

Of course, it may also be that investors do not really know how bonds work. Last month I discussed how individuals now own about seventy percent or $3 trillion of the $4.2 trillion municipal market. In a February 12th Bloomberg article, author Martin Z. Braun looked at the returns (after fees) of open-end municipal bond mutual funds compared to customized portfolios known as Separately Managed Accounts (SMAs). Long national municipal open-ended mutual funds delivered 2.25%, -1.01%, 0.83% and 2.21% for one year, three-year, five-year and ten-year respectively. Looking at the performance of long national municipal separate managed accounts (SMAs), those clocked in with 0.58%, -1.35%, 0.47% and 2.13% for the same respective periods.

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Bears Out The Problem

March 5th, 2025 by Kurt L. Smith

Trend reversals take time with long term trends taking a long time to reverse. Throughout the multi-decade stock and bond bull markets we were used to trend reversals. By the time a downward trend was recognized, the odds were the correction was nearing its end and prices began to rise again. You might know this as buying the dips. It worked well for both stocks and bonds following the corrections of 2000, 2008 and 2020. But bonds failed to continue their bull ways while stocks went on to set new highs since then.

Bonds reversed trend in March 2020 almost five years to the day. We have entered a bond bear market, and you know it largely because I remind you every so often. Investors bought bonds on the dip in 2020, including you. Other investors invest in the bond market. Here at The Select ApproachTM, we rely on individual bonds to perform differently from the market.

Rather than selling one’s bonds in 2020 investors continued to buy because they were accustomed to buying dips. Even when the bond market failed to reach new highs in price, investors seemed pleased to buy cheaper bonds at yields much higher than in 2020. Buy more in a bear market? That is the power of Wall Street. That is the power of optimism. That is the power of not knowing the power of a bear market.

Of course, it may also be that investors do not really know how bonds work. Last month I discussed how individuals now own about seventy percent or $3 trillion of the $4.2 trillion municipal market. In a February 12th Bloomberg article, author Martin Z. Braun looked at the returns (after fees) of open-end municipal bond mutual funds compared to customized portfolios known as Separately Managed Accounts (SMAs). Long national municipal open-ended mutual funds delivered 2.25%, -1.01%, 0.83% and 2.21% for one year, three-year, five-year and ten-year respectively. Looking at the performance of long national municipal separate managed accounts (SMAs), those clocked in with 0.58%, -1.35%, 0.47% and 2.13% for the same respective periods.

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Your Bonds Need Your Help

February 5th, 2025 by Kurt L. Smith

Everyone seems to have some bonds. There are tens of trillions of dollars in bonds out there. The Securities Industry and Financial Markets Association (SIFMA) puts the figure at $46 trillion in the United States and $119 trillion worldwide. Closer to home, municipal bonds now make up $4.2 trillion of the market, per the Federal Reserve, with individuals making up 70% of the market (about $3 trillion) according to Franklin Templeton.

As we discussed last month, investors in the bond markets own the market. Everyone’s portfolio looks like everyone else’s portfolio. When the municipal market started 2024 like a house on fire, everyone benefited. Year-to-date returns, per Bloomberg’s Municipal Bond Index, approached double digits through the first three quarters, only to lose almost all of it in the fourth quarter.

This is what happens when you are not investing with the trend. The trend for bonds is lower prices. I discussed for many months how trending markets will usually undergo a multi-month correction, and that is how I was describing 2024’s bond performance. Individuals piled into municipals, not realizing they were buying into a bond bear market and at the wrong time.

Investing in bonds the same way one has always invested in bonds is…, well you tell me. Look at your results over the past year, or three years, or five years. You are investing in a market in which the trend is down. And you are paying for the privilege, either a little, or a lot.

When it comes to bonds, it also does not matter what fund you own or who the manager is or what their past performance has been. You own bonds and in a bear market your performance is going to suffer. Since seemingly no one has determined that this is a bond bear market, I would say the greatest suffering is yet to come.

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Performance Matters

January 6th, 2025 by Kurt L. Smith

It is the new year and with optimism gripping the financial world ebullience is everywhere. Contagion? Evidently because everyone is excited for the new year, the new administration, new tax laws, less regulation…a veritable Shangri-La here at home.

Unfortunately, the bond market failed to get the message. Or perhaps it did; just think about how bad the bond market would be if there was not a contagion of optimism?

The scorecard for 2024 is now out and bonds were not the place to be. Not just compared to the one-two punch of stocks for the second straight year, but as a standalone asset class. Bonds should yield something, particularly when people are buying them left and right because, hey, they now yield something.

The results say otherwise. For the year, the Bloomberg US Treasury Index clocked in with a +0.58% gain for the year (all prices and yields per Bloomberg).  If we add Corporate Bonds and Mortgages to the mix, the Bloomberg US Aggregate Bond Index finished up 1.25% for the year while the Bloomberg Municipal Bond Index, a highflyer almost year all year as we discussed in the October 28th letter when up 9.81%, finished up a mere 1.05% for the year.

Longtime readers know this is not a new phenomenon. Performance figures in a bond bear market are difficult because the wind (the trend towards lower interest rates) is no longer at your back but instead buffet you in the face (as the trend is toward higher interest rates). It has been almost five years since the bond bear market began in March 2020. In now appears we are almost halfway through what is shaping up as a lost decade of bond market performance.

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High Flying Municipals

April 26th, 2024 by Kurt L. Smith

I continue to find worthwhile municipal bonds for clients despite the historically expensive pricing of generic municipal bonds. While treasury securities are at their highest yields (and lowest prices) in over five months, municipal bonds continue their relative pricing superiority.

Packages of municipal bonds, such as mutual funds and exchange traded funds (ETF’s), are priced high relative to their historical averages to treasury securities. Such high prices have helped their performance relative to other fixed income securities.

Today, the ten-year AAA municipal yield of 2.74% is but 59% of the 4.64% of the ten-year treasury note (all yields and prices per Bloomberg). As we have talked about recently, if such spread was even 70% (much less of a historical outlier), municipal yields would need to rise about fifty basis points to 3.25%. Lower actual yields mean municipal bond prices are priced higher, thus contributing to positive performance of late.

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It Was The Best Of Times

November 27th, 2023 by Kurt L. Smith

The holidays are upon us with the words of Charles Dickens usually coming from a stage near you, though these words are not from his A Christmas Carol. The opening line from A Tale Of Two Cities could also describe bond buyers here in the opening weeks of November.

The month began with ten-year U.S. Treasury note yields near 5% at 4.93%, just below a sixteen year high of 5.02% on October 23rd (all yields and prices per Bloomberg). For owners of long duration bonds, it has certainly been the worst of times of late. For those ready to take the plunge and buy at these high yields and low prices, it may be the best of times.

A mere three weeks later and yields have plunged, or at least dropped a bunch, to below 4.40% on November 17th. Hurry, before you miss out! But as a point of reference, 4.40% is also a sixteen year high for the treasury’s ten-year note, save the last three months.

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Still Zig Zagging Away

June 3rd, 2023 by Kurt L. Smith

According to Bloomberg’s Nic Querolo, municipal bonds lost 1.38% for the month through late May, which would make it the worst May performance since 1986’s 1.63% loss. Querolo goes on to say May has been the strongest month for municipal performance over the past ten years at up .9% on average.

While I place the beginning of the bond bear market in March 2020, municipal bonds did not peak until August 4, 2021, per Bloomberg, selling off into the first leg of the bear market October 26, 2022 with a 13.4% decline in the Bloomberg Municipal Bond Total Return Index.

The correction since late September/early October has occurred for many, if not all, asset classes, municipals included. It was the correction’s peak in April that set up municipal bonds dreadful May.

We are still in correction territory and unfortunately (for traders), that is a tough place to be. February was a dreadful month for municipals as well but the bond market’s response to the bank failures in early March sent prices to new correction highs (new yield lows). Will we see another move to new correction price highs or is a tough May the precursor of higher yields yet to come?

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Merely Gaining Steam

April 28th, 2022 by Kurt L. Smith

Last month I discussed whether the bond bear market had finished its first leg down or was it merely gaining steam. Over the past few weeks, we got an answer to that question.

I also discussed the importance of stocks moving to new highs or there is a risk for a larger correction. What is a larger correction? I believe we can place Netflix (NFLX – NASDAQ) as the new poster child for the definition of larger correction. At its recent price of $193.50 on April 27, 2022 (all prices and yields per Bloomberg), Netflix is down 72% from its all-time high of $700 set just five months earlier on November 11, 2021. Again, merely gaining steam.

The “What, me worry?” crowd continues to fiddle while Rome burns. The losses in bellwether US treasury notes and bonds over the past several months is unprecedented. The losses in the NASDAQ for April 2022 may be among the worst months ever. 3% mortgages are now 5% mortgages and inflation is, pick a number, 8%?

My get-out-of-bonds mantra for the past two years has now morphed into get-out-of stocks. Normalcy was exceeded months ago and is now moving toward extreme, yet capitulation evades us. Instead, we are looking at wave after wave of continued downward prices for financial assets.

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Worst Quarter Since 1973

March 30th, 2022 by Kurt L. Smith

Bloomberg published this line on March 22nd as their US Treasury Index had lost 5.55% since year end, surpassing the 5.45% loss at the beginning of 1980, the biggest quarterly decline since their index was created. In the middle of the bond bear market’s first move, this type of poor performance is to be expected.

Some people look at the bond market’s performance as the tortoise versus the stock market’s hare. Every day, bond investors look into the mirror (at bond performance) and it looks as if little has changed. Here, in the early stages of the bond bear market, nothing could be further from the truth.

The yields on the risk-free US treasury bellwethers we track have soared over the past two years. The 1.5% treasury note of February 15, 2030, sold at a .31% yield (111-19) on March 9, 2020 (all yields/prices per Bloomberg). This past week that note traded at 2.52% (92-23). This is an almost 19-point loss or 17% on the bellwether ten-year treasury note. Longer maturities fared far worse. Our bellwether is the 2.375% of November 15, 2049, and it sold at .70% or 140-17 on March 9, 2020. Last week this bond sold at 2.67% (94-09) for a 46-point loss or 33% of value.

Bond bear market? I do not recall reading that headline in the New York Times or splashed across magazine covers of late. But a dribble here and a dribble there while looking in the mirror has eroded significant values in the risk-free-rate US treasury market.

Almost all this price erosion happened before the Federal Reserve hiked interest rates. That did not happen until March 16th. So much for fed leadership; how’s that for Fed response?

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