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Posts Tagged ‘municipal bond market’

The Right Bond, Part 2

February 29th, 2024 by Kurt L. Smith

Interest rates on ten-year U.S. treasury notes are closing out the month of February near their highest in three months. Not so for municipals. New issue municipals, usually the driver or yardstick for other municipal bond prices and yields, continued to trade near record relative values.

While ten-year U.S. treasury yields began the month near 3.90% and spent most of the last two weeks at or above 4.25%, municipal yields went the other way. We can compare Wylie TX ISD in Collin County, on the east side of Dallas, with last month’s Wylie TX ISD in Taylor County, on the south side of Abilene. Yields are lower across the board on this week’s Wylie compared to last.

Today, February 28th, the ten-year AAA municipal-treasury ratio was below 60% at 59.6. This ratio was consistently above 80% for the last twenty-plus years, save the past three. Asset values, including municipal bonds, were quite volatile in the period of the lockdown in 2020 when U.S. treasury yields plunged to near zero percent and bond prices hit their bull market highs. But as the market settled down, it appears investors have a desired preference for municipal bonds making the 80% ratio the new high rather than the old low.

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The Right Bond

January 31st, 2024 by Kurt L. Smith

We began 2024 with municipal bonds having rallied, not just in price, but also relative to U.S. Treasury yields. Ten-year generic AAA municipal yields were 3.62% on October 23rd and 2.35% on December 23rd (all prices and yields per Bloomberg). Compared to treasury yields, the 2.35% on municipals was 62% of the 3.78% on treasuries.

Municipal bonds are spread product. Investors like us buy them because the bonds offer a spread (better yield) to the so-called risk free U.S. Treasury bonds of a similar maturity. At 62%, municipal bonds offer some of the smallest spreads in decades yet investors continue to buy. Bloomberg’s Joe Mysak noted this last week, saying “if munis revert to their long-term valuations, or around 85% of treasuries, they should yield more than 3.50% right now…there’s still a long way to go.” Yields have bumped up slightly. Look at this month’s new issue highlight: the Wiley Independent School District in Abilene, TX bonds below. But as Mysak says, they still have a ways to go.

Yields on municipals continue to be much higher than those we saw in 2020, 2021 or 2022, though on a relative basis they are quite expensive. Tens of billions of dollars of new issue long-term municipal bonds were priced in January. They do not need our help getting them sold. Municipalities never need our help, whether interest rates are low and going lower or high and going higher.

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Slow-Moving Trainwreck Over

September 22nd, 2023 by Kurt L. Smith

Today, September 21st marks the official end of the bond market correction that began last fall. Bloomberg’s US Generic Government thirty-year yield index hit 4.57% (all yield and prices per Bloomberg), the highest since 2011. Their ten-year index hit 4.50%, the highest since 2007. The two-year version of the index hit 5.20%, the highest since 2006, and within range of 5.35%, which would be the highest since 2000. The treasury market had been within spitting distance of this breakdown for weeks, as followed in previous letters.

The slow-moving portion of the financial markets, however, belongs to stocks, which are currently trading at the same levels as over two years ago (pick whichever index you like; the story is the same). The bullishness we have witnessed over the past many months has not resulted in higher prices, but instead lower ones. As the reality sets in that the correction in prices since last fall is slipping away (the slow-moving train wreck), expect the price plunge to accelerate as stocks join their highly correlated bond brethren in the continuation of the bear market.

Real economic damage has occurred already. My favorite bellwether US treasury bond, the 1.25% of May 15, 2050, traded at a new low of 48.5 today after trading over 102 three years ago on August 6, 2020. With treasuries of all maturities trading at twelve-plus-year lows, it appears that almost all bond portfolios are underwater, with those portfolios of longer duration significantly underwater. The last time long term bond prices were this low, last October, First Republic Bank, Silicon Valley Bank and Signature Bank collapsed months later. These were three of the four largest US bank collapses in history.

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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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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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Still Zig Zagging Away

June 3rd, 2023 by Kurt L. Smith

According to Bloomberg’s Nic Querolo, municipal bonds lost 1.38% for the month through late May, which would make it the worst May performance since 1986’s 1.63% loss. Querolo goes on to say May has been the strongest month for municipal performance over the past ten years at up .9% on average.

While I place the beginning of the bond bear market in March 2020, municipal bonds did not peak until August 4, 2021, per Bloomberg, selling off into the first leg of the bear market October 26, 2022 with a 13.4% decline in the Bloomberg Municipal Bond Total Return Index.

The correction since late September/early October has occurred for many, if not all, asset classes, municipals included. It was the correction’s peak in April that set up municipal bonds dreadful May.

We are still in correction territory and unfortunately (for traders), that is a tough place to be. February was a dreadful month for municipals as well but the bond market’s response to the bank failures in early March sent prices to new correction highs (new yield lows). Will we see another move to new correction price highs or is a tough May the precursor of higher yields yet to come?

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Zig Zagging Away

April 27th, 2023 by Kurt L. Smith

As discussed last month, the correction continues. Stocks are trading about the same as where they were five months ago. Bonds are mostly higher, but the last three months have been volatile. Bottom-line, corrective periods such as these usually resolve in the direction of trend.

Volatility in bonds, as measured by the ICE BofA Move Index (all prices sourced from Bloomberg), showed the most volatility since the bear market began in 2020. The recent volatility began as the two-year treasury note yield bottomed in early February at 4.03%, spiking to over 5% on March 8th just as the news of the troubles of the Silicon Valley Bank began to hit. A wicked reversal ensued, with yields bottoming at 3.55% just a couple of weeks later March 24th. With two-year yields moving from .10% on January 5th, 2021, per Bloomberg’s Generic Two-Year Index, to 5.07% on March 8th, 2023, one might have expected a correction. So far, we have seen 3.55% on March 24th.

Looking at longer bonds, where price fluctuation matters, the correction on the US Treasury bond future began with a low October 24th, 2022 at 117-19 with a correction high of 134-14 on April 6th, a rise of about fifteen percent. The contract had closed within 2% of this high on four earlier occasions since mid-December, pulling back each time.

This bouncing back near its high pattern is like what we have seen in stocks: a market seemingly going nowhere. What we have been doing is marking time. As investors experiencing a bull market for many decades, marking time has been acceptable because the trend was upward in the bull market.

Now that we are solidly in a bear market pattern, marking time is an opportunity to evaluate where you are as the next move usually resolves with the trend. As with any correction, the question becomes when? We may not remember how awful stock market performance was back last October, but then bang, the correction started. This, unfortunately, is usually how it ends as well. Be prepared.

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Now It Gets Interesting

February 17th, 2022 by Kurt L. Smith

Long-term investors, I mean old investors, have experienced market reversals. As night becomes day, market selloffs lead to new, higher prices. This law of nature does not apply to markets, though one’s experience tells one otherwise.

Over the last 40 years we have seen downdrafts leading to new highs. You remember the dates: 1987, 2000, 2007, and lately, 2020. What you may not be aware of is the same dates also saw similar action in bonds. The long-term bull market for stocks was mirrored by bonds. Bond and stock performance marched ever upward, together…until they did not.

I have worked hard to let you know the bull market in bonds is over. Yields traded at such a next-to-nothing interest rate in March 2020 resulting in record high bond prices. Compared to the double-digit yields of the early 1980s, which equated to record low bond prices, I believe the bond market has completed its long bull market journey. The bond bull market is over, and you should not own bond mutual funds.

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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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Never Sexy

September 6th, 2018 by Kurt L. Smith

Another month, another summer. I hope your summer was worthwhile, mine certainly was. Usually things run slower during the summer months and again that was true in our little corner of the market. Yet, despite no one quite knowing how municipal bonds “work”, they continue to do so. For us anyway.

While some stock indexes hit new all-time highs last month, that doesn’t equate to much change at all over the past six months. Some say the same thing about municipal bonds, even the ones I’ve found for them, but these folks are thinking short-term. I don’t deal in the latest, shiniest object. Nothing sexy here.

Cash and cash alternatives are rarely sexy. Yet this is the asset class which I believe is rising in prominence and will continue to do so over the next number of years. It is also an area of expertise that not many people possess.

Anyone can buy treasury bills, short-term notes and bonds and call it cash alternatives. Do it for as long as you want, then let’s compare your returns. Oh, you’ve come up with a new way to skin a cat…. again let’s compare returns. (more…)

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