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Posts Tagged ‘lower for longer’

Bonds Continue Their Roll (Role)

December 29th, 2021 by Kurt L. Smith

Another year, another dollar. Certainly explains the bond market.  As no-to-low yields continue to dominate the bond market, a dollar is about what many new bonds will pay you. And with little volatility, like stocks, total returns were positive. In other words, bonds fulfilled their role.

Only the US Treasury Total Return was negative this year, with Corporate Bonds and Municipal Bonds positive per Bloomberg’s indices. The US Treasury performance, while a loser, didn’t lose much year-over-year. With the melt-up of 2019 culminating in March 2020, US Treasury bond (past) performance looks stout. Again, bonds did their job.

But at current no-to-low yields, past performance is priced in. Many investors will look at the year and probably make few, if any, changes.  Why change what is working? There is no need to dump bonds as they have seemed to do their job, fulfilling their role.

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Low Rates Are Not Enough

September 27th, 2021 by Kurt L. Smith

For almost forty years interest rates have moved lower and for many of us we will forever regard today’s rates as low. This is nothing new. We have lived in a low interest rate environment now for many years.

Not content with relying solely on the economic drivers of low interest rates, the Federal Reserve has, at various times these past many years, decided it also needed to buy bonds. Evidently low rates are not enough.

Buying bonds might spur you or your brethren to also buy bonds. After all, bond prices can move upward just like other asset prices and in 2020 the prices for US Treasury notes and bonds soared.

Despite continued Federal Reserve bond buying, US Treasury notes and bonds climaxed in 2020. Investors know that down forty percent in price represents quite a climax. What happened Fed? Why aren’t investors continuing to buy US Treasury notes and bonds and following your lead?

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What Is An Investor To Do?

August 24th, 2021 by Kurt L. Smith

For forty years you have known the answer to this question. You buy and you buy more. Hindsight is wonderful and it also can give you great confidence. Stay the course, invest with us…turn on the television and follow the financial ads. So easy.

Except the world changed eighteen months ago. Not the pandemic; the bond market top-ticked almost forty years of a bull market. As a reader of this letter, you know the bellwether US treasury bond had a final run-up of forty points and then lost all of that. The bond bull market is over.

You may question, or continue to question, the relevance of such a situation. Obviously stock investors do not care, judging by the corresponding market move in stocks. But what is eighteen months in the scheme of things?  We are talking about your retirement or managing money (yours or others)?  These are long-term concerns. Besides, what if the run-up in stocks is merely the stock version of what we saw in bonds in 2020? What happens when stocks top-tick?  The status of the bond market is relevant, regardless of how or when it chooses to assert itself.

I do not need higher interest rates to find worthwhile bonds. I can do it in a low-to-no-interest rate environment as I have for the past ten-plus years. My interest in following the bond market, particularly the movement of US Treasury bellwether’s is because it matters.

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We Are All Traders Now

September 23rd, 2020 by Kurt L. Smith

Over the past couple of months, we have witnessed what it is like to be winners. Investors of stocks and bonds have watched their portfolios move higher with interest rates at or near historic lows, bond prices are unbelievable high. And the effects of high bond prices have reverberated across asset classes.

I pick on bonds because they are “fixed income”. There is only so much income a bond generates (it’s coupon amount) and for only so long (it’s maturity). So, when interest rates are near zero, the price of the bond is approximately, or near, the sum of all of its cash flows (coupons plus maturity or par amount).

A 1% ten year noncallable bond that sold at 100, would be priced at 110 if interest rates moved to 0%. At .50%, the bond would be priced at approximately 105, still a nice 5% gain from no-or-low interest rates to even lower rates.

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Time Marches On

August 7th, 2020 by Kurt L. Smith

Unfortunately, there is no finish line for investing. If there was, we could now declare stocks a winner, bonds a winner, gold a winner, real estate…well, you get the idea. But there is tomorrow to deal with, not to mention next year and years from now.

Investing is a longer period endeavor. Bond investors know this as every bond you buy reminds you with a maturity date. What will happen over the next year, or two, five or ten or more years? Bond investors confront this reality with every purchase.

Wherever you want to draw the line, financial assets have been winners. Year-to-date, last year or two, last five…they, for the most part, have been good times for you as an investor of financial assets.

All of that is in the past; investing is about the future. If investing were a race, it would be an endless one as time marches on. Decisions made can be worthwhile as well as decisions not made. Second-guessing can be debilitating and is to be avoided. That is why it is important to make sound decisions.

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High Demand for (Low) Yield

December 16th, 2019 by Kurt L. Smith

Long-time readers are well aware of my call to the end of the thirty-plus year bond bull market in 2012. That’s seven years now behind us. For long-term bonds this period has been quite a topping process (in 2012, 2016 and again in 2019) with the primary result being the tremendous issuance of new debt.

Treasury debt has exploded from $4.3 trillion in 2006 to $15.9 trillion in 2019 (Q2). My debt figures come from a wonderful website, www.sifma.org, check it out.  Luckily the Federal Reserve has been there as the primary buyer, expanding their balance sheet in various quantitative easing programs.

Right behind treasuries in debt expansion is corporate debt, rising from $4.9 in 2006 to $9.5 trillion (Q2). Federal Reserve Chairman Jerome Powell said in October that “leverage among corporations and other forms of business, private businesses, is historically high” –Bloomberg.

Indeed, not only are bond prices high (yields low) but there are more of them! As long as “lower-for-longer” holds, values should hold. Interest rates are low, so low it would appear that negative interest rates are a closer reality than higher interest rates.

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Thankfully, We Own Municipals

May 4th, 2018 by Kurt L. Smith

Three percent ten year US Treasury notes have generated recent buzz with the highest interest rates in over four years. More interesting may be the yield on two year treasury notes at over 2.50%, the highest yield in over nine years.

Lower for longer? This mantra for investing in both bonds and stocks has blown up. Interest rates are not lower and haven’t been lower for many years. My job is not to convince believers of the mantra that they have it wrong. Besides, despite rising interest rates, performance figures haven’t changed appreciably one way or the other. We continue to move forward with our approach.

Our municipal bond market is a relatively puny player in the world of financial assets. With $3.8 trillion outstanding in municipal bonds, municipals make up a small portion of the $40 trillion US bond market (SIFMA). Black Rock and Vanguard each manage more financial assets than the entire municipal bond market.

In the scheme of things, municipals do not matter. In the great buildup of the $40 trillion US bond market, municipals have become but a rounding error or an opportunity for diversification, whether warranted or not. (more…)

Moving Ahead

August 3rd, 2017 by Kurt L. Smith

Narratives make great stories, coaxing investors to invest but rarely the impetus to sell.  Narratives, the stories about why the market is behaving this way or that, add fuels to the fire of salesmanship and lines up well for the growing herd, the multitude of trend followers. 

The great narrative of the past few years has been yields are (and will forever be) low, so you should add riskier assets to your portfolio. This narrative has been in place so long ( for years) it appears it will never change.

Our approach shows otherwise. In the incredibly unique world of municipal bond investing, opportunities have existed in high quality credits that are not available in any other asset class. In a world focused on scale, size, generic products and spread, the municipal bond market offers this as well as alternatives to this. (more…)

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