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Posts Tagged ‘long-term trends’

Early Stages

March 10th, 2026 by Kurt L. Smith

Last month I asked, “How About a Little Volatility?” Bonds, which reach one of their lowest volatility levels in over four years on January 26th, experienced a noticeable increase. It was the largest rise in bond market volatility since the beginning of spring last year.

Why does rising volatility matter? In my experience, periods of increased volatility can sometimes create additional opportunities in the municipal bond market. One way to think about it is similar to shaking a pecan tree; more shaking can sometimes produce more.

Another potential sign of change may be developing in the two-year US treasury note. After trading near historically low yields of approximately 0.10% on February 11, 2021, five years ago, the two-year yield peaked at 5.25% on October 19, 2023. Since then, yields declined (prices increased) for a period of more than two years, reaching 3.36% on March 2nd before moving back up to 3.63% this week.

Viewed over a longer time horizon, the trend of the two-year notes increased from approximately 0.10% to 5.25% before experiencing a multi-year pullback to around 3.36%. If so, this could portend higher short-term interest rates for the future as the trend reasserts itself and yields move to newer highs.

The two-year tax-exempt municipal yield has shown a broadly similar look to the two-year treasury note, going from approximately .03% on August 4, 2021, to 3.75% about two years later October 23, 2023. The index was 2.00% two years later on September 17, 2025, and 2.01% last week before rising with treasury yields to approximately 2.14%.

Comparatively, the 2.14% tax-exempt yield represents roughly 60% of the 3.55% on the two-year US treasury note. Depending on an investor’s tax bracket, time horizon, and investment objectives, one could wonder who finds 2.14% tax free for two years attractive. I sure do not, but demand from investors for municipal securities has generally remained steady, keeping spreads on municipal bonds tight compared to treasury yields.

We continue to find many worthwhile municipals compared to new issues (below) as well as the indices, yet we are cautious, and hopeful, that yields rise across the board from here. Setting the trend, correcting the trend, with both taking two years or so, appears to look complete. Yields on treasury notes and bonds as well as municipal bonds should move higher from here.

Higher yields can create headwinds for municipal bond mutual funds as well as managed products, particularly those that have benefited recently by adding duration by buying longer term bonds. As we have talked about these past couple of years, bond portfolio performance has been lousy since the end of the bond bull market in 2020, though the correction of the past two years has made recent returns somewhat tolerable. Mutual fund and managed fund performance could change dramatically if, as I expect, interest rates are now beginning their climb towards new higher yield territory.

The world is full of risks and investors have largely enjoyed the ability to ignore them. After setting the trend towards lower bond prices and higher yields, I believe the bond market is now poised to set new lows in price as yields work towards new highs.

Recent New Issue Example

Sheldon Independent School District Bonds

Series 2026

Aa3 Underlying Moody Aaa PSF Guaranteed

Due 2/15 Dated 4/1/26 Maturity 2/15/54

$58,815,000 Sold

Years Maturity Coupon Yield*

1 2027 7.00% 2.32%

2 2028 7.00% 2.33%

3 2029 7.00% 2.37%

4 2030 7.00% 2.40%

5 2031 7.00% 2.45%

6 2032 7.00% 2.53%

7 2033 7.00% 2.62%

8 2034 5.00% 2.69%

9 2035** 5.00% 2.79%

10 2036** 5.00% 2.88%

11 2037** 5.00% 3.00%

12 2038** 5.00% 3.13%

13 2039** 5.00% 3.25%

14 2040** 5.00% 3.34%

15 2041** 5.00% 3.44%

16 2042** 5.00% 3.57%

17 2043** 5.00% 3.72%

18 2044** 5.00% 3.87%

19 2045** 5.00% 4.03%

20 2046** 5.00% 4.18%

21 2047** 5.00% 4.27%

22 2048** 5.00% 4.33%

23 2049** 5.00% 4.36%

26 2052** 5.00% 4.44%

30 2056** 4.50% 4.50%

*Yield to Worst (Call or Maturity) **Callable 2/15/34

Source: Bloomberg

This is an example of a new issue priced the week of 3/2/26. 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. The views expressed are those of the author as of the date of publication and are subject to change without notice. Market conditions and economic developments may cause actual results to differ materially from those discussed. 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.

How About a Little Volatility?

February 6th, 2026 by Kurt L. Smith

How About a Little Volatility?

At least with Groundhog Day, you know things are expected to change either sooner or later. Not so with markets. Solid demand for municipal bonds continues to keep that market moving forward along with stock market indices. We know what follows a low volatility period in markets: high(er) volatility. We just do not know when the change will happen.

In the metals market, the “when” came last week as silver plunged forty percent over a two-day period while gold “only” lost twenty percent. For those of you looking for alternatives out there, this is how markets work. Some happen quickly like the above metals, while Bitcoin and Oil have lost forty percent over a longer time frames with Bitcoin peaking in October 2025 and Oil in March 2022. All these markets have a way to go to catch our bellwether U.S. Treasury Bond, the 1.25% of May 15, 2050, which is back to trading below fifty cents on the dollar compared to the slight premium it traded at shortly after its issue in 2020.

Trends happen. Trends have been established in Bonds, though we know many argue that this is a buying opportunity. I am sure many continue to say the same about the markets discussed above. Things are beginning to happen, albeit slowly, particularly in the U.S. treasury bond market. Today, February 2nd, the ten-year U.S. Treasury note closed at a 4.28% yield. This is the highest close since late August (save 4.29% on January 20th). Why is this significant? The Federal Reserve cut its benchmark interest rate three times since late August, on September 17th, October 29th, and December 10th, yet the ten-year note has failed to follow, reversing course after hitting 3.93% on October 17th.

Expectations for further rate cuts by the Federal Reserve continue to be priced into the treasury yield curve. This is to say short term yields on treasury securities are low (3.5% to 3.8%, approximately) while longer term yields are rising now 4.25% to over 4.90%). But expectations are just that and they are subject to change, sometimes by a lot and sometimes quickly.

You have been lucky enough to live through one of the greatest asset price booms of all time. Owners of long-term bonds know, or should know, after almost six years since peaking that the price boom of Bonds is over, though investment professionals somehow continue to convince investors they should continue to own bonds. Hope appears to be their plan, and like expectations, hope can shrivel.

After huge moves in asset prices, Cash becomes king. Managing Cash through the tax-exempt, as well as taxable, municipal bond market is what we have been doing for our clients for many decades. We provide our clients with stability; your monthly statement is a testament to that. We continue to find select municipal bonds that we believe to be worthwhile in this market as well as for the trends that are established.

Copperas Cove Independent School District Bonds

Series 2026

AA- Underlying S&P AAA PSF Guaranteed

Due 2/15   Dated 2/1/26 Maturity 8/15/54

$79,110,000 Sold

Years   Maturity       Coupon        Yield*

1         2027             5.00%           2.26%

2         2028             5.00%           2.26%

3         2029             5.00%           2.50%

4         2030             5.00%           2.50%

5         2031             5.00%           2.36%

6         2032             5.00%           2.44%

7         2033             5.00%          2.53%

8         2034             5.00%          2.59%

9         2035             5.00%          2.69%

10       2036             5.00%          2.77%

11       2037**          5.00%          2.91%

12       2038**          5.00%          3.07%

13       2039**          5.00%          3.19%

14       2040**          5.00%          3.31%

15       2041**          5.00%          3.47%

16       2042**          5.00%          3.60%

17       2043**          4.00%          4.00%

18       2044**          4.00%          4.10%

19       2045**          4.00%          4.15%

20       2046**          4.00%          4.23%

21       2047**          4.125%        4.31%

22       2048**          4.25%          4.37%

25       2051**          4.25%          4.48%

28       2054**          4.375%        4.52%

*Yield to Worst (Call or Maturity) **Callable 2/15/36

Source: Bloomberg

This is an example of a new issue priced the week of 1/26/26. 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.

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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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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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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Loaded With Optimism

April 29th, 2025 by Kurt L. Smith

Are investors concerned out there? Some may say so, but most are doing nothing. Stocks have sold off, but most indices have recovered, some, maybe half, of their losses. Lots of talk, fretting, ignoring, but seemingly little selling going on.

One might expect this in the stock markets. After all, the major stock indexes set record highs in the past several months and remain nicely higher than where they were a year or two (or many years) ago.

This is not the case for bonds. We are five-plus years removed from the bond bull market top in 2020, and investors have little, if anything, to show for their loyalty of sticking with their bond investment.

Performance matters were so I would think. Last month I wrote how losing four points on long term bonds makes positive performance very difficult. Then came April.

On April 4th the Treasury Bond Future traded above 122; on April 9th it traded below 112 (all yields and prices per Bloomberg). Ten points lower in three days. Volatility in bonds is nothing new in the ever-expanding bond bear market. Since setting a ten year low in 2020, the ICE Bank of America MOVE index has trended higher. Volatility is not your friend, and it has spread to the stock market as well.

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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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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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Sideways Breaking Down

July 6th, 2023 by Kurt L. Smith

Last month we focused on the performance of the municipal bond market. We asked the question: would the market’s sideways trading action continue or would the higher rates we saw in May continue for municipal bonds? Municipals bond prices bounced (their rates fell) and, once again, sideways continued for municipals. But it is the leadership of the shorter-term U.S. Treasury market that is on the move.

One year treasury bill yields also weakened in May, trading at a new high of 5.27% on May 26th (all prices and yields per Bloomberg). Another reason this move was significant is because this yield exceeded the previous high of 5.23% on March 8th, just as the so far, short-lived, banking crisis erupted, liquidity rushed in and days later the bill traded at 3.83% on March 16th. The correction in short term treasuries is now over.

June did not turn out to be much in terms of new territory for bonds until the final days of the month. One year treasury bills hit another new high of 5.43%, while two-year treasuries traded at 4.93%, spitting distance from their high of 5.08% set, you guessed it, March 8th. Even ten-year treasuries traded at their highest yield since March at 3.89% versus 4.09% in March.

The leadership in rising interest rates demonstrated by the new highs in treasury yields (new lows in prices) or knocking at the door of new high in yields is important. As optimistic as the world seems to be a bear market in bonds, particularly a bear market on the move, is not in the narrative. The rise in treasury yields appears to be narrative busters.

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