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Posts Tagged ‘mania’

Capitulation

June 14th, 2017 by Kurt L. Smith

It is not often that followers of the all-too-staid bond markets get to use the word capitulation. Usually things don’t move fast enough (or far enough) to warrant the use of the word. We, however, having declared the end of a three decades long trend, see a significant change taking place.

We marked late 2012 as the end of the bull market in Bonds, though the hockey-stick final mania in the longest maturing bonds didn’t occur until last spring, culminating July 6, 2016. Shorter term bond yields had risen since 2012 while the 10 year US Treasury bottomed at 1.32%, a significant turning point in trend.

The second half of 2016 saw yields spike to 2.64%, such that by year-end (December 2016 Letter) we called for a correction of this first move in the long-term bear market for long-term bonds. Indeed yields moderated back down to 2.13% early in June. So far so good and right along our projected path.

Which brings us to today. Actually it was a June 9th Bloomberg headline that used Capitulation, saying “Investors betting on rising bond yields just threw in the towel in a big way, according to Bank of America.” Citing the “biggest inflows to bonds in well over two years”, BofA concluded the performance of credit equities are “highly correlated.” (more…)

Municipal Bonds Are Different

February 3rd, 2017 by Kurt L. Smith

While technically all municipal bonds are government bonds, municipal bonds represent a subset of government bonds. Unlike the behemoth debt associated with almost all countries on the planet, including ours, municipal bonds are, well, usually smaller and sometimes just small.

Size matters, except when it comes to debt, bigger usually is not better. This is a qualitative difference where municipal bonds have the ability to shine. Unlike the debt upon debt upon debt of most government debt today, municipalities have the ability to truly be unique in their amount of leverage.

All five year bonds are five year bonds. And almost every five year government bond will be repaid because the government has promised to repay it. These government bonds carry the “full faith and credit” of their issuer to be repaid and are known as general obligation bonds.

When it comes to general obligations, bigger can indeed be better. Larger governments usually have more resources and usually are viewed as being less risky, or even safe or without (credit) risk as United States treasury bonds were viewed. (more…)

Lines In The Sand

January 19th, 2017 by Kurt L. Smith

On January 10th, Big Bill Gross the Bond King, drew his line in the sand referencing the ten year treasury yield at 2.60%. If the ten year yield goes above 2.60% this year, said Big Bill, the bear bull market would be on and its effects on the stock market would be felt.

Now you tell us Bill. After a historic first half of 2016 which gave us the final throes of a mania in Bonds, we experienced  a historic sell-off in the second half with yields doubling from July to December in ten year yields. Indeed, the bear market for bonds has not only begun but, depending on maturity horizon, has been in place since 2012.

With the stock market continuing its version of the Bonds final mania, Big Bill probably also knows that nobody cares. Off his throne at PIMCO, Big Bill probably needed to reference stocks in his bond bear market call for relevance sake.

Until the mania in stocks ends, and like the long bull market in bonds, it will end, no one will probably care, or notice, the bond market. Investors in stocks are making money just by owning stocks, not by listening or following experts like Big Bill. (more…)

The Wait Is Over

December 7th, 2016 by Kurt L. Smith

I love it when a plan comes together. The August letter, First Bonds, Now Stocks, could not have been more spot on. The latest rally in Bonds began to reverse in July and it appears the first move towards a Bond Bear Market is now in place. And indeed the excitement the markets reserved for Bonds earlier this year did indeed move to Stocks with a recent exclamation point capping a three thousand point move up in the Dow that began in February.

For those of you reading the press clippings of these latest moves, please remember the narratives are worthless. Trends do not extend forever and long-time readers of this letter know I have been preparing for a change in the long-term trends of Stocks and Bonds for some time.

My excitement that my long wait may finally be over is based on the excitement both the Stock and Bond markets registered in 2016. Soaring prices, plunging and even negative yields, characterized the Bond market all spring long. Prices topped (and yields bottomed) in July with the bellwether thirty year US Treasury bond at 2.08%; by the first of December it was over 3.08%, an almost 50% jump in yield and 19% plunge in price. (more…)

Thankfully, You Own Municipals

September 9th, 2016 by Kurt L. Smith

While interest rates may appear they will be low, perhaps forever, we are always encouraged when we look back over the past months and years and discover we’ve actually fared well. Municipals are indeed unique and that is why we can continue to scratch and claw, but most importantly make headway by investing in them.

Bonds, particularly municipal bonds have participated in a multi-month rally that was over-extended months ago. As a consequence, we believed stocks would also rally, continuing the tandem performance that has been a hallmark of the financial markets these past thirty-plus years.

Indeed the major stock averages have set many new all-time high marks this summer. Stocks may have a few more months to rally, but the bond rally may be over.  As conviction and certainty for low rates (forever) continued, the bond market appears to have made a top in price that may stand for many, many years. (more…)

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