The Knowledge Vault
Newsletter Sign-up >>>

 

Latest Newsletters

Posts Tagged ‘Municipal bond’

Talk, Talk, Talk

September 3rd, 2026 by Kurt L. Smith

We have not seen this many articles about Bonds in a very long
time. We have a new Federal Reserve, Chairman Kevin Warsh,
and investors want to know what to expect. I suggest you do
something a little more productive, like enjoy a blowout weekend
to celebrate one of the longest unofficial summer seasons in
recent memory.


Bonds are on their way to becoming a four-letter word, but there
is a long, long way to go. Bond salesman, chiefly the new Federal
Reserve chairman, dealer bank chief economists, and anyone
who manages bonds for a living, will tell you now is a great time to
invest in bonds. Shocking!


The experts used to tell us how great an investment in bonds has
been (performance-wise) along with the compliance tagline “past
performance is no guarantee of future results.” Now that
performance figures are, well, lacking, we are told to “look at that
yield!”


Performance is an important metric, which makes investing in a
bond bear market a very difficult proposition. Of course, this
brings up the issue for some as to whether we are in a bear
market or if we are still a bull market. I remember the 1980s when
double digit interest rates peaked and interest rates fell to 7% in
1986, my first year in bonds. Shortly afterwards in 1987 they
climbed again to double digits. Was it still a bear market in
bonds? No! All of this to say it took some investors almost ten
years to finally figure out we were in a bond (and stock) bull
market.


We are already six-plus years into the new bond bear market.
You are fortunate that you invest in municipal bonds because
municipal bonds may provide opportunities in a bond bear market
that US treasury bonds, corporate bonds, and mortgage may not
provide. The reason is diversity; no other market comes close.


Remember “lower for longer?” I believe a former Federal Reserve
Chairman touted that. Was he prepared for inflation that certainly
would result from a surging money supply response to the COVID
pandemic? Talk about lack of credibility. Yes, do something
productive with your time and celebrate the end of summer or
focus on your stock portfolio.


The market will do what the market will do, but in general, the
market can trend. With interest rates moving up from near zero in
2020, a downward correction in rates from 2023 through early
2026, we are now entering the meat of the trend. It is why interest
rates in the thirty-year bellwether treasury hit post-2007 highs in
yield last month and why the two-year treasury note and ten-year
treasury note closed last week within a couple of basis points of
their twelve-month highs, certainly within striking distance of their
own multi-year highs.


Bonds can be a great tool in your portfolio. But if you do not see
maturity dates on your bonds (or bond products) or those dates
seem to be beyond your comprehension, you might want rethink
your bond portfolio. And if your portfolio includes US treasuries,
corporate bonds, or mortgages, you might want to consider what I
believe to be a worthwhile alternative in municipal bonds (both
tax-free and taxable).


Now may be a good time to review your commitment to the
bonds. Performance figures have been poor and the trend
remains challenging. Let’s talk.


Arlington Independent School District, TX
Unlimited Tax School Building Bonds, Series 2026
Aaa Moody (Permanent School Fund Guarantee) Aa1
(Underlying) AAA S&P (PSF) AA Underlying
Due 2/15 Dated 9/15/26 Maturity 2/15/51
$125,000,000 Sold


Years Maturity Coupon Yield*

1 2027 5.00% 2.61%

2 2028 5.00% 2.67%

3 2029 5.00% 2.77%

4 2030 5.00% 2.89%

5 2031 5.00% 3.00%

6 2032 5.00% 3.08%

7 2033 5.00% 3.23%

8 2034 5.00% 3.35%

9 2035 5.00% 3.47%

10 2036 5.00% 3.58%

11 2037** 5.00% 3.72%

12 2038** 5.00% 3.84%

13 2039** 5.00% 3.93%

14 2040** 5.25% 4.02%

15 2041** 5.25% 4.10%

16 2042** 5.25% 4.16%

17 2043** 5.25% 4.21%

18 2044** 5.25% 4.26%

19 2045** 5.00% 4.37%

20 2046** 5.00% 4.44%

21 2047** 5.00% 4.53%

22 2048** 5.00% 4.59%

23 2049** 5.00% 4.63%

24 2050** 5.00% 4.68%

25 2051** 5.00% 4.70%

*Yield to Worst (Call or Maturity) **Callable 2/15/36
Source: Bloomberg
This is an example of a new issue priced the week of 8/24/26.


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.

Bond Bear Market Enters Next Phase

August 6th, 2026 by Kurt L. Smith

I have been looking for higher interest rates since my Early Stages letter March 10th along with the follow up Wild Swing letter April 6th. The market has delivered. Across all maturities of U.S. Treasury securities, rates have jumped, bond prices have fallen, and performance figures for treasury investors renewed their downward slide.

Yet despite the rise in treasury yields, I did not believe they indicated the Federal Reserve should or would raise interest rates last week, even a small 25 basis points. So, guess the result? In my view, faced with an opportunity to lead (cut rates) or follow (like decades of Federal Reserve policy before him), new Chairman of the Federal Reserve Kevin Warsh chose to follow.

Traditional wisdom holds that the Federal Reserve can influence short-term rates, but it is the market that determines longer-term rates. At least the traditional wisdom is half right; In my view, the market controls all rates, and the Federal Reserve follows closely so not to lose what credibility it has.

In my opinion, the Federal Reserve’s credibility suffered greatly last week. With inflation running over the Federal Reserve’s target 2% rate for the past five years, treasury investors appear to be demanding more yield to compensate. But even with interest rates on ten-year and thirty-year treasuries trading near or at twenty-year highs, the question of how high inflation can run or how high is high for interest rates remains.

(more…)

Treasury Prices Weaken, Municipals Yawn

July 16th, 2026 by Kurt L. Smith

The above headline is typical for municipal bonds. Today the two-year US Treasury note traded at 4.28% while the NR/AAA/NR rated Alamo Heights, TX bonds detailed below were priced today at 2.60% or 61% of treasuries. Depending on your tax situation, you may need to be in a relatively high tax bracket for new issue municipals to be worthwhile compared to taxable alternatives.

Expanding to the global universe of treasuries and municipals you would think they lived on different planets. US Treasury Bond performance as tracked by the Bloomberg Treasury Index has a 2.69% one-year performance while Bloomberg’s Municipal Bond Index sports a 6.52% performance for the same period. Over the past five years the outperformance has also appeared otherworldly with the Treasury Index losing 3.7% for the period and the Municipal Bond Index up 5.38%, though on an annualized basis that is a slightly negative annual Treasury performance versus up 1.05% annually for the Municipal performance.

If investors, or more likely investment managers, continue to buy municipals at or near 61% of treasuries, municipal bond outperformance could continue. But that is not how we approach municipal bonds over time. Taking a longer perspective, bond performance across both assets tends to look alike because interest rates are interest rates, reflecting the costs of borrowing with treasury yields primarily serving as the base case.

(more…)

Wow, Look at The Demand

June 17th, 2026 by Kurt L. Smith

If you have read any stories about the municipal bond market lately, chances are they include the words high demand and capital inflows. Investors love municipal bonds and are sending record amounts of inflows to all things municipal, particularly exchange traded funds.

The trend of higher demand for municipal bonds is not new. Some of these stories reference the best inflows (demand) since 2021 or perhaps the best demand ever. The 2021 reference should be a tell because municipal bond performance since 2021 has generally been challenged by rising interest rates. That year municipal bond yields went from near zero to just better than near zero, not exactly the time to be moving into any bond market.

The trend to watch in municipal bonds, as well as any bond market, is the direction of U.S. Treasury yields. Treasuries are the dog wagging the other bonds (municipals, corporates, and mortgages) tail. The trend for US Treasury yields has been up since 2020 but recency bias during the correction phase of the trend (2023 through early 2026) has been…exciting?

Long-term thirty-year bellwether treasury yields hit a nineteen-year high of 5.20% on May 20 while the two-year treasury note had a sixteen-month high of 4.20%. Throw treasury bill yields into the mix, and the overall picture suggests the market continues to assess the possibility of additional Federal Reserve policy tightening, which historically has created challenges for bond prices.

Indeed, municipal bonds are not treasury bonds, and that is exactly the reason that we are able to find worthwhile bonds in the municipal bond market. We have sought to find you worthwhile bonds in the middle of a bull market, at the height of the bull market, through zero to low yields, as well as whatever one wants to call 2026. This is how and why our approach to municipal bond investing often looks different from that of other professional managers.

(more…)

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.

(more…)

Bears Out The Problem

March 9th, 2025 by Kurt L. Smith

Trend reversals take time with long term trends taking a long time to reverse. Throughout the multi-decade stock and bond bull markets we were used to trend reversals. By the time a downward trend was recognized, the odds were the correction was nearing its end and prices began to rise again. You might know this as buying the dips. It worked well for both stocks and bonds following the corrections of 2000, 2008 and 2020. But bonds failed to continue their bull ways while stocks went on to set new highs since then.

Bonds reversed trend in March 2020 almost five years to the day. We have entered a bond bear market, and you know it largely because I remind you every so often. Investors bought bonds on the dip in 2020, including you. Other investors invest in the bond market. Here at The Select ApproachTM, we rely on individual bonds to perform differently from the market.

Rather than selling one’s bonds in 2020 investors continued to buy because they were accustomed to buying dips. Even when the bond market failed to reach new highs in price, investors seemed pleased to buy cheaper bonds at yields much higher than in 2020. Buy more in a bear market? That is the power of Wall Street. That is the power of optimism. That is the power of not knowing the power of a bear market.

Of course, it may also be that investors do not really know how bonds work. Last month I discussed how individuals now own about seventy percent or $3 trillion of the $4.2 trillion municipal market. In a February 12th Bloomberg article, author Martin Z. Braun looked at the returns (after fees) of open-end municipal bond mutual funds compared to customized portfolios known as Separately Managed Accounts (SMAs). Long national municipal open-ended mutual funds delivered 2.25%, -1.01%, 0.83% and 2.21% for one year, three-year, five-year and ten-year respectively. Looking at the performance of long national municipal separate managed accounts (SMAs), those clocked in with 0.58%, -1.35%, 0.47% and 2.13% for the same respective periods.

(more…)

Performance Matters

January 6th, 2025 by Kurt L. Smith

It is the new year and with optimism gripping the financial world ebullience is everywhere. Contagion? Evidently because everyone is excited for the new year, the new administration, new tax laws, less regulation…a veritable Shangri-La here at home.

Unfortunately, the bond market failed to get the message. Or perhaps it did; just think about how bad the bond market would be if there was not a contagion of optimism?

The scorecard for 2024 is now out and bonds were not the place to be. Not just compared to the one-two punch of stocks for the second straight year, but as a standalone asset class. Bonds should yield something, particularly when people are buying them left and right because, hey, they now yield something.

The results say otherwise. For the year, the Bloomberg US Treasury Index clocked in with a +0.58% gain for the year (all prices and yields per Bloomberg).  If we add Corporate Bonds and Mortgages to the mix, the Bloomberg US Aggregate Bond Index finished up 1.25% for the year while the Bloomberg Municipal Bond Index, a highflyer almost year all year as we discussed in the October 28th letter when up 9.81%, finished up a mere 1.05% for the year.

Longtime readers know this is not a new phenomenon. Performance figures in a bond bear market are difficult because the wind (the trend towards lower interest rates) is no longer at your back but instead buffet you in the face (as the trend is toward higher interest rates). It has been almost five years since the bond bear market began in March 2020. In now appears we are almost halfway through what is shaping up as a lost decade of bond market performance.

(more…)

Managing Municipal Bond Portfolios

June 28th, 2024 by Kurt L. Smith

It seems we cannot get enough of municipal bonds, taxable or tax free. The deals keep coming, the orders overflow, and some even get filled. Shampoo, rinse and repeat.

More demand than supply should keep bond prices buoyant. Unfortunately, financial products do not work that way. Wall Street’s job is to supply more when demand is high, and Wall Street is doing exactly that by creating more and more bonds (debt) to keep up.

Demand is high so municipal bond deals are large as well, some well over a billion dollars. According to Joe Mysak, Bloomberg’s long-time resident municipal bond market expert, this week marked “the 27th deal of $1 billion or more, with overall borrowing accelerating at a torrid pace.” Amazingly, the municipal bond market remains around $4 trillion, the same as 2020, according to SIFMA website. Actual current figures are $4.1 trillion, the same as two years ago and barely higher than $3.9 trillion in 2019. So perhaps the $200 billion difference is due to larger deals! Shampoo, rinse and repeat as old bonds mature and they need to be replaced.

So how does one manage municipal bond portfolios? Largely they are managed with scale. This is where new deals like this month’s Eagle Mountain – Saginaw ISD featured bond comes into play. The best time, perhaps the only time, to buy a $5 million, $10 million, or $25 million piece is when they are first distributed. This is not new. The new issue market has been on the shampoo, rinse repeat treadmill for many years.

(more…)

Everyone (It Seems) Loves Municipals

May 29th, 2024 by Kurt L. Smith

After many months of expensive pricing relative to treasuries, municipal bond prices began to capitulate this week. Together with treasury price weakness, longer term municipal bond prices are breaking down with yields jumping upwards.

Last month we discussed that the bond market correction was hanging on by a thread. By mid-month it appeared the correction phase was intact as ten-year treasury yields moved from 4.73% on April 25th to 4.31% on May 16th (all prices and yields per Bloomberg). The spirited move saw some sympathy with two-year treasury notes (from 5% down to 4.70%), but just a few days later the two-year note is back to 4.95% on May 24th.

Remember, it is the shorter-term treasury yields that shape Federal Reserve policy, not the other way around. With short-term treasury bills and two-year notes at or near their highest yields for the year, this trend is not encouraging.

If there is such a thing in the bond market as everyone on one side of the boat, it is the duration trade. With yields on bonds at levels investors have not seen in years it seemed to make sense to buy some longer bonds to take advantage when the Federal Reserve lowers interest rates again. This could help explain bond prices rallying nicely in last year’s fourth quarter. Municipal bonds were trading about 75% of treasuries (ten-year maturity basis) to begin the move in October and later hit a record low of 57% in March, further amplifying municipal bonds bounce up in prices.

(more…)

High Flying Municipals

April 26th, 2024 by Kurt L. Smith

I continue to find worthwhile municipal bonds for clients despite the historically expensive pricing of generic municipal bonds. While treasury securities are at their highest yields (and lowest prices) in over five months, municipal bonds continue their relative pricing superiority.

Packages of municipal bonds, such as mutual funds and exchange traded funds (ETF’s), are priced high relative to their historical averages to treasury securities. Such high prices have helped their performance relative to other fixed income securities.

Today, the ten-year AAA municipal yield of 2.74% is but 59% of the 4.64% of the ten-year treasury note (all yields and prices per Bloomberg). As we have talked about recently, if such spread was even 70% (much less of a historical outlier), municipal yields would need to rise about fifty basis points to 3.25%. Lower actual yields mean municipal bond prices are priced higher, thus contributing to positive performance of late.

(more…)

NEWS FEED

Tweetomatic error: Could not authenticate you.