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Posts Tagged ‘historically low spreads’

Bonds (Don’t) Move

January 20th, 2021 by Kurt L. Smith

Everyone can agree bond yields are low. Another way of saying that is, everyone can agree bond prices are high. But unlike the unhinged high prices of stocks, bonds are tethered to a maturity. The assumption of course being that the bond will be paid at time of maturity.

This risk of being paid (or not) is usually compared against what many consider to be the risk-free rate of US Treasury securities. Thus, Treasuries represent a non-credit risk option as they are assumed to be paid; the government will simply print more money to redeem them. All other (US) bonds do not have this feature of printing additional money; therefore, they are considered spread products.

As you know I recommended selling your bond products (mutual funds primarily), marking March 6th as the high-water mark for bonds. To say that March was a volatile month borders on understatement, but we witnessed US Treasury notes and bonds trade at their all-time highs in March.

The ten-year, Treasury note receives the most attention in the marketplace. For most of 2020 the note yielded less than 1%, again, a low yield in anyone’s book (and a high price). But recently the yield has moved over 1% leading to, well, the focus of this letter.

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Our World Has Changed

June 17th, 2020 by Kurt L. Smith

Most of us come to realize that change is inevitable and adapting to change is a part of life. Sometimes change is like aging in front of a mirror:  it isn’t until you look back several years that you realize, yes, I have changed…I mean aged.

This, of course, is not what I am talking about. Today we have a sea change (literally), as well as one massive change after another. The world has changed and adapting to it will be key to our survival.

My focus here is on the bond market, which just happens to be the primary tool of our monetary authorities: The Federal Reserve and the central banks of the world.  Fiscal authorities are also joining the bond rush as governments issue bonds to finance their response to our changed world.

The fundamental change that happened in the bond market occurred in early March and was the subject of my April letter. US Treasury securities traded at yields of 0.70% and lower across all maturities from a few days out to the longest thirty-year maturity per Bloomberg. This extremely low (or no) yield means longer term bond prices were at their highest prices ever as the price of the bond includes, effectively, almost all of the income you would receive in the days, years or even decades to come for the bond.

But it is not just treasury bonds. Other bonds such as mortgages, corporates and municipals also benefitted by the high bond prices as the yield spread on those bonds in early March were at or near historical lows. Historically low spreads, together with the low (no) yields of the treasury base means bond prices on almost all bonds were their highest prices ever.

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