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Posts Tagged ‘bond market performance’

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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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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Far From A Foregone Conclusion

October 31st, 2025 by Kurt L. Smith

Federal Reserve Chairman Jerome Powell opened his remarks following the October 29th quarter point interest rate cut saying: “A further reduction in the policy rate at the December (10th) meeting is not a foregone conclusion, far from it.” I am not a Fed watcher, but I applaud a statement that at least appears to be forceful.

Mr. Powell may be frustrated in my opinion. The Federal Reserve has cut the target interest rate 150 basis points, from 5.50% in September 2024 to this week’s 4%. What does the Federal Reserve have to show for it? When your mandate is to keep inflation low and employment high, I think the Federal Reserve should be frustrated, particularly when your declared inflation goal is 2% and we have not sniffed that level in years.

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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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