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Posts Tagged ‘bond market trend’

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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Correction Over

January 30th, 2023 by Kurt L. Smith

Yes, the correction in both stocks and bonds is now over. For the past forty-or-so years that would have been a good thing. But in a bear market, the end of a correction should be foreboding as the trend to lower prices reasserts itself.

As in the past several years, U.S. treasury bonds are taking the leadership position. After many months of weakness in 2021 and 2022, the correction in bonds began in November as treasury prices across all maturities began to rally. Oftentimes, corrections in a bear market can seemingly occur on a dime and suddenly thrust prices higher. The correction lasted until the middle of January and now the bear trend should reassert itself.

It is the municipal market, of all places, where we can see the correction at its fullest. Last year was among the worst ever for bond market performance but even horrible markets correct. Beginning in mid-November, prices on treasuries leapt upwards and yields, which had been moving higher, suddenly plunged lower.

Municipal bonds are a spread product. Investors buy them because the tax exemption gives them a higher net yield after taxes. So, it would make sense that municipal bonds would rally in the correction like the prices of US treasury securities.

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More of the Same

January 31st, 2022 by Kurt L. Smith

No, I did not delay writing this letter until we heard from the Federal Reserve on Wednesday afternoon. When was the last time the Fed surprised? Indeed, this Federal Reserve chair, Jerome Powell, is more of the same.

In the mold of the maestro, Alan Greenspan, Powell serves up optimism with the confidence that the Federal Reserve has “our tools and we will use them” to get the job done. Not only does he have the tools, but he also has experience using them. Whereas former Fed chair Bernanke questioned whether he had the authority to act and act boldly, Chair Powell suffers no such hesitation. He has already been there and done that.

Chair Powell has decisions to make. Inflation is the worst in 40 years, interest rates are rising without his involvement and the Federal Reserve balance sheet now stands at $9 trillion ($8.867TR, per Bloomberg). Thankfully everyone is working…everyone that hasn’t retired, quit, or been sidelined by COVID

This past month things are beginning to break down. Our beloved bond market, the one I continue to shoo you away from, continues to deteriorate. One should not own bond mutual funds which has been my stance for almost two years now. Benchmark yields such as the two-year US treasury note or the ten year note have risen substantially, yet Fed Chair Powell continues to wait.

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Correction Over Reexamined

October 27th, 2021 by Kurt L. Smith

No, I am not referring to recent stock market activity, but hopefully I got your attention. Since July’s letter “Correction Over” bonds have performed poorly, as expected. While the bond market’s poor performance has yet to rub off on other markets, it would be a mistake to ignore what is unfolding.

Interest rates are rising and not just a little. I continue to watch the bellwether US Treasury bond, the 2.375% of November 15, 2049, which traded at 113 back in July when I wrote “Correction Over” (yields and prices per Bloomberg). This past week the bond traded at 105 for an 8-point loss over three months.

The ten-year US Treasury note, the 1 ½% February 15, 2030, traded at 103.75 (1.04%) in July and 99.25 (1.60%) last week for a 4.5-point loss. But it was the five-year US Treasury note, the .25% of August 31, 2025, which really moved from .63% in July to a doubling to 1.25% last week. Those five-year treasuries traded over 100 in September 2020 and last week traded at 97 (1.04%). Originally buyers of this short, five-year note, have seen twelve years of income in market value evaporate over the past fifteen months. Thank goodness the note will mature at par, though in 2025!

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