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Posts Tagged ‘bond market performance’

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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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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