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Posts Tagged ‘bond market trend’

Something Is Changing

October 8th, 2025 by Kurt L. Smith

You are not reading this letter for advice on the stock market or crypto so obviously that is not what I am talking about with respect to change. The change I am talking about, of course, is regarding interest rates. On September 17, 2025, the Federal Reserve reduced the federal funds rate by 25 basis points cut on September 17th as anticipated. Odds are currently high for another 25 basis point cut on October 29th (94.6% odds of cut per Bloomberg as of October 7, 2025).

We have talked about short-term cash yields and how the trend there has been lower. But the low yields for the past six months occurred on or about September 17th. On the short-term side, six-month US treasury bills bottomed at 3.75% on September 16th and are basically flat since, hence the continued high odds for another rate cut at the end of this month.

Yields on longer term US treasury ten-year notes hit their six-month low on September 17th, and just as I told you last month, yields have bounced higher since. This is early stage, but so far, the ten-year yield has done everything a change in trend needs. Look for higher yields on the ten-year note throughout year end and beyond.

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Municipal Performance Lags

August 4th, 2025 by Kurt L. Smith

What else is new? According to Bloomberg the municipal bond market is “logging its worst performance relative to US government debt since the start of the pandemic.” Municipals have lost 1% so far this year, trailing the 3% gain on US treasuries by about four percentage points.

Municipal bond pundits love to talk about supply and demand in the new issue market.  but over the long term, we believe that supply and demand should even out. As we have talked about for years, performance is determined not by owning the market, but by selecting your municipals with performance in mind.

We are in a bear market for bonds, and this means you have the wind in your face instead of at your back. Rising interest rates subtract from performance. Prior to the end of the bull market, falling interest rates gave a capital gain performance boost to portfolios. This trend change, in March 2020, makes performance figures in bonds look quite puny ever since.

For example, as of August 1, 2025, Vanguard Long-Term Tax-Exempt Fund Admiral Shares (VWLUX) reported total returns of -1.77%, +1.63%, and +0.18% for the one-, three-, and five-year periods, respectively (Source: Bloomberg).  You can pick your favorite municipal bond vehicle and it, unfortunately, will probably look fairly similar.

Similarity in the municipal market appears to be the rule in our four trillion-dollar market. Yes, managing assets is a matter of scale, as it appears most of the participants hold similar bonds. How else can I describe similar performance figures?

Owning the market has its advantages, particularly in a bull market. Owning seven stocks has its advantages as well, if they are THE seven stocks and the market continues as a bull. But owning the market in municipal bonds may not serve you as well as selecting your municipal bonds may serve you. Look at your statement over the past one-, three- and five-year periods or even longer.

In my opinion, the bear market for bonds is not complete. The asset gathering of Wall Street firms continues in municipals and watch any of their commercials; they are not selling the idea of buying in a bear market. Hard to fathom a bond market where our bellwether bond, the US Treasury 1.25% 5/15/2050 traded at over 100 in 2020 and consistently in the 50s or below for almost three years now, is worthwhile. Somebody, or something, owns that bond and hopefully it is not you. Have municipal bonds fared better than that bellwether? Perhaps, but who wants them; it is an indictment on owning long-term bonds in a bear market.

There are much better ways to keep your money safe and earn a worthwhile return at the same time. Individual municipal bonds are the key in a bond bear market. Individual bonds have maturity dates, unlike the mutual funds and exchange traded funds that are marketed however they are marketed. A maturity date is key; it was key to avoiding 5/15/2050 (then and now).

Since April 2025’s dramatic sell-off in bonds, interest rates have been trading in a range. How long this will continue, I do not know. But I do believe the trend is for higher interest rates despite seemingly everyone else continuing to invest in the municipal market, and its pathetic performance returns, hoping for better. The trend is not their friend, but it is ours.

Let me show you how The Select ApproachTM could work for you. For example, the Georgetown ISD bonds (below) is indicative of the general market. Look at those yields, below 3%, even before Friday’s rally (8/1/2025). We have options for short-term tax-exempt bonds; I suggest you consider them. We continue to find worthwhile bonds and I look forward to hearing from you.

Georgetown Independent School District, Texas

Unlimited Tax School Building and Refunding Bonds, Series 2025

Aa2 Moody Underlying AA Underlying S&P

Aaa Moody and AAA S&P on Permanent School Fund Guarantee

Due 2/15   Dated 8/26/25 Maturity 2/15/55

$334,005,000 Sold

Years   Maturity       Coupon        Yield*

1         2026             5.00%           2.52%

2         2027             5.00%           2.54%

3         2028             5.00%           2.57%

4         2029             5.00%           2.61%

5         2030             5.00%           2.75%

6         2031             5.00%           2.97%

7         2032             5.00%           3.10%

8         2033             5.00%          3.27%

9         2034             5.00%          3.38%

10       2035             5.00%          3.57%

11       2036**          5.50%          3.71%

12       2037**          5.50%          3.89%

13       2038**          5.50%          4.00%

14       2039**          5.00%          4.20%

15       2040**          5.00%          4.31%

16       2041**          5.00%          4.40%

17       2042**          5.00%          4.52%

18       2043**          5.00%          4.64%

19       2044**          5.00%          4.69%

20       2045**          5.00%          4.73%

21       2046**         5.25%          4.76%

22       2047**          5.25%          4.81%

23       2048**          5.25%          4.84%

24       2049**          5.25%          4.87%

25       2050**          5.25%          4.87%

30       2055**          5.25%          4.90%

*Yield to Worst (Call or Maturity) **Callable 2/15/35

Source: Bloomberg

This is an example of a new issue priced the week of 7/28/25. Provided for illustrative purposes only and is not a recommendation to buy or sell any specific investment.

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.

But Look At The Yield!

April 4th, 2025 by Kurt L. Smith

Last month I left you looking for higher rates. The ten-year treasury note had corrected from 4.80% in mid-January to 4.10% (all prices and yields per Bloomberg). The 4.10% yield on March 4th was indeed the low last week; on March 27th the yield hit 4.40%.

My point is not how to trade the ten-year treasury note. My point is performance matters. Since 2020, the trend in bonds has been down in price (up in yield). This makes performance in the bond markets very difficult. Rather than having the wind at your back (bull market), the wind is in your face.

This makes bond market corrections, as we saw earlier this year (4.80% to 4.10%), a signal for what comes next. Looking at the bigger picture, we saw 5% yields in October 2023 and 3.60% in September 2024. Understanding that those moves in rates were corrections gets us ready for what is next: still higher rates.

Higher interest rates and lower prices are easily seen in the trading of longer-term bonds. The March 2025 treasury bond future traded at 119.5 on March 4th and below 115.5 on March 27th. Losing four points inside of a month makes positive performance very difficult; a wind in your face.

Municipal yields also jumped comparing the Texas A&M bonds below with last month’s El Paso Water and Sewer. With individual ownership of municipal bonds at seventy percent or $3 trillion of a $4.2 trillion market, we can assume owners will continue to do what they have done: hold and buy more. This is not a recipe for success; it has certainly not been our recipe.

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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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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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Change Appears At Hand

July 31st, 2024 by Kurt L. Smith

In April my letter examined whether the Federal Reserve would begin cutting rates. Optimism abounded as the ten-year treasury note yield fell from 5% to 3.88% (prices rose) in the fourth quarter of 2023 (all prices and yields per Bloomberg). By April such optimism had taken a hit as higher yields (lower prices) left the bond market correction hanging on by a thread.

Since October of last year, the treasury market has been in a correction. From near 0% (0.31%) in March 2020 to 5% on ten-year treasury notes, the market was due, if not overdue, for a correction. Short term treasury bills had seen a similar run from negative yields on the six-month treasury bill in March 2020 to 5.59% in August of last year, with most of the move happening in the preceding twenty months.

The bond market correction has not only hung in, but treasury bills (three months and six months) hit their lowest yield (highest price) in the correction last week, completing an A-B-C correction. Three-month bills moved from 5.51% on October 6th to 5.28% this week, while six-month bills went from 5.59% to 5.12%. A ten month correction of a twenty month move? One can make an argument that short term treasury bills next move from here is toward higher interest rates not lower.

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Everyone (It Seems) Loves Municipals

May 29th, 2024 by Kurt L. Smith

After many months of expensive pricing relative to treasuries, municipal bond prices began to capitulate this week. Together with treasury price weakness, longer term municipal bond prices are breaking down with yields jumping upwards.

Last month we discussed that the bond market correction was hanging on by a thread. By mid-month it appeared the correction phase was intact as ten-year treasury yields moved from 4.73% on April 25th to 4.31% on May 16th (all prices and yields per Bloomberg). The spirited move saw some sympathy with two-year treasury notes (from 5% down to 4.70%), but just a few days later the two-year note is back to 4.95% on May 24th.

Remember, it is the shorter-term treasury yields that shape Federal Reserve policy, not the other way around. With short-term treasury bills and two-year notes at or near their highest yields for the year, this trend is not encouraging.

If there is such a thing in the bond market as everyone on one side of the boat, it is the duration trade. With yields on bonds at levels investors have not seen in years it seemed to make sense to buy some longer bonds to take advantage when the Federal Reserve lowers interest rates again. This could help explain bond prices rallying nicely in last year’s fourth quarter. Municipal bonds were trading about 75% of treasuries (ten-year maturity basis) to begin the move in October and later hit a record low of 57% in March, further amplifying municipal bonds bounce up in prices.

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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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Manic Market?

January 3rd, 2024 by Kurt L. Smith

I have been tempted through the years to write my letter as “just like last month.” It certainly could apply this month. Treasury bond prices, as well as stock prices, are on a tear. Municipal and corporate bonds are right there with them. Everyone, it seems, has moved to one side of the boat.

This is the time of year for the pundits. Review 2023, predict 2024, we were right, they were wrong…it is an annual event. It is also a time to revisit perspective.

Over the past six months, longer-term interest rates, such as the ten-year US treasury note, rose from 3.85% on July 3rd to 5.02% on October 23rd and now back to 3.85% today, December 29th (all prices and yields per Bloomberg). For a price perspective, the newest ten-year US treasury note for the period, the 3.375% of May 15th, 2033, sold at 96, 88 and now back to 96 over the same six-month timeframe. These are nice juicy moves for traders, but who is a trader?

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Everyone Is A Bull

July 26th, 2023 by Kurt L. Smith

Month after month after month of seemingly never-ending higher prices has galvanized almost everyone as a bull. Last October’s low prices seem to be long forgotten. Let the good times roll! Of course, I am talking about the bond market.

The bond market is every bit as bullish now as the stock market. The bond market gave up its role as market arbiter so long ago most investors no longer know (or care) that bond investors were once considered voice of reason (or the alarmists in the room). Bond vigilantes in Wikipedia refer to the Clinton, and later, Obama administration. Certainly, they are no longer relevant, even if they existed…they long became bond market bulls, like everyone else.

The bond market is so big, and it has performed like a bull for so long, every manager’s bond portfolio essentially looks alike: a portfolio chock full of duration because that is where long-term performance has been made. After all, it is a bull market world out there and everyone seems to know it.

Portfolio managers cannot afford to sell bonds that have performed almost every single year and of course this year their performance has been nothing but up. So, ride the bull wave just like their stock investing brethren.

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