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Posts Tagged ‘treasury bond’

Should We Be Traders?

March 24th, 2021 by Kurt L. Smith

One year ago, I wrote my March 6th letter highlighting the risks of bond market investing when treasury securities all yielded less than 1%. It was a watershed moment and one I believed would be a reference point for years to come.

We have been following the bellwether treasury note and bonds as they continue to lose value as interest rates move higher. The ten-year note, 1.50% of 2/15/30, traded this past week below par at 98-22, down from 111-19 on March 9, 2020 or 11.5% lower (all prices from Bloomberg). The thirty-year bond, the 2.375% of 11/15/49 traded at a discount of 97-11+ versus 140-17 on March 9, for a 30.7% loss.

From a trading perspective, original buyers of these treasuries have watched their portfolio values surge and then come back to earth. A forty-point gain in the long bond is now wiped out. This is the nature of buying into a late-stage bull market. How high is high? Will you know it when you see it? Will you act or freeze?

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Be Prepared

February 24th, 2021 by Kurt L. Smith

The past week has been a tragedy down here in Texas. One crisis morphed into another leaving dozens dead and tens of billions in destruction. Simply terrible and preventable.

As a Texas native, ridiculously cold weather for a ridiculously long (for us) time is not a once in a century experience. Every decade or so it happens. But Texans are not all native Texans now (or ever). Texas has been growing by transplants forever and their expectations eventually collide with a horrible reality.

A gardener prepares his garden in the winter. A homeowner prepares her pipes before they freeze. An investor prepares for the downturn as the market moves higher. There is time for celebration but there is also time for work, the preparation what comes next.

Last month we focused on the ten-year Treasury note and long bond. Friday, February 19th, those sold at new low prices (high yields). The long Treasury bonds has now lost 35 points in value from March 9, 2020 at 140.17+ to 105.05+ Friday (all prices from Bloomberg). One of the recently sold ten-year Treasury notes, the .625% of August 15, 2030, has now lost more in price that it ever promised to pay investors in interest over its ten-year life, trading at 93.6875.

These treasuries are, of course, the favorite investment for the Federal Reserve Bank. Their appetite for all treasury securities has grown on their balance sheet from about $2.5 trillion a year ago to $4.8 trillion now (per Bloomberg). All the while, their price continues to fall.

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Bonds (Don’t) Move

January 20th, 2021 by Kurt L. Smith

Everyone can agree bond yields are low. Another way of saying that is, everyone can agree bond prices are high. But unlike the unhinged high prices of stocks, bonds are tethered to a maturity. The assumption of course being that the bond will be paid at time of maturity.

This risk of being paid (or not) is usually compared against what many consider to be the risk-free rate of US Treasury securities. Thus, Treasuries represent a non-credit risk option as they are assumed to be paid; the government will simply print more money to redeem them. All other (US) bonds do not have this feature of printing additional money; therefore, they are considered spread products.

As you know I recommended selling your bond products (mutual funds primarily), marking March 6th as the high-water mark for bonds. To say that March was a volatile month borders on understatement, but we witnessed US Treasury notes and bonds trade at their all-time highs in March.

The ten-year, Treasury note receives the most attention in the marketplace. For most of 2020 the note yielded less than 1%, again, a low yield in anyone’s book (and a high price). But recently the yield has moved over 1% leading to, well, the focus of this letter.

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Our World Has Changed

June 17th, 2020 by Kurt L. Smith

Most of us come to realize that change is inevitable and adapting to change is a part of life. Sometimes change is like aging in front of a mirror:  it isn’t until you look back several years that you realize, yes, I have changed…I mean aged.

This, of course, is not what I am talking about. Today we have a sea change (literally), as well as one massive change after another. The world has changed and adapting to it will be key to our survival.

My focus here is on the bond market, which just happens to be the primary tool of our monetary authorities: The Federal Reserve and the central banks of the world.  Fiscal authorities are also joining the bond rush as governments issue bonds to finance their response to our changed world.

The fundamental change that happened in the bond market occurred in early March and was the subject of my April letter. US Treasury securities traded at yields of 0.70% and lower across all maturities from a few days out to the longest thirty-year maturity per Bloomberg. This extremely low (or no) yield means longer term bond prices were at their highest prices ever as the price of the bond includes, effectively, almost all of the income you would receive in the days, years or even decades to come for the bond.

But it is not just treasury bonds. Other bonds such as mortgages, corporates and municipals also benefitted by the high bond prices as the yield spread on those bonds in early March were at or near historical lows. Historically low spreads, together with the low (no) yields of the treasury base means bond prices on almost all bonds were their highest prices ever.

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Bonds Rolled Over (Again)

November 18th, 2019 by Kurt L. Smith

From the front pages this summer, the story on bonds is they are no longer a story. Prices have rolled over as yields have risen and investors who bought on the price dips lately may be rethinking their commitment.

I have spent most of the last few years, as well as the last few months telling you this was the end of the run, not the beginning of a new one. The performance of the bond market over these years fits my description.

After several years of higher yields and lower bond prices, the bond market began a price correction late last year. But it was the performance of long-term treasury bonds in July and August of this year that received the out-sized attention. One of the longest treasury bonds, the 2.875% of 2049, rallied from about 100 in May, to 105 in July and 122 in August (source: Bloomberg, with prices rounded for conversation sake). Quite a move for a bond yielding less than 3%.

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The Topping Process Continues

August 8th, 2019 by Kurt L. Smith

The Dow Jones Industrial Average sold off almost 2,000 points in just a few days recently. The Dow now trades at the same level as it did back in January 2018.

Bonds meanwhile continue their move higher in price (lower in yield) as unlike stocks, their corrective move had added momentum. When it comes to bonds, we hear statements like highest prices (or lowest yields) since 2016. That’s because the current bond market rally is a correction of the downward price trend in bonds that dates back to 2016 (for me 2012).

Last month’s letter discussed how I expected asset prices of bonds, stocks and gold to soon complete. We have seen the initial move down for stocks and I look for similar strong downward moves to begin in bonds and gold at any time.

“At any time” is the operative word. Last month’s market focus was based on the movements of the asset markets over the past weeks as well as the past several years. Markets behave like markets, despite the actions of central bankers or presidents, war or peace. So last month’s giddy didn’t indicate a continuation of trend, but rather the end of a move.

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Treasuries Tank; Any Followers?

June 1st, 2018 by Kurt L. Smith

When it comes to interest rates you know we rejected the “lower rates for longer” mantra from the beginning. Largely this was due to the fact that we believed interest rates were bottoming and the new long-term trend of ever increasing rates, which we called in November 2012, was just beginning.

The chart below details significant interest rates over the past five-plus years of our journey. Longer-term rates on ten year and thirty year notes and bonds challenged our premise briefly in 2016, allowing the “lower rates for longer” mantra to swell, but the results, or shall I say, performance, speaks for itself.

 

All-Time Low Yield            June 2017  Low                       Recent High

0.14%      9/20/11                1.26%    6/2/17                   2.60%    5/17/18

0.53%      7/25/12                1.67%    6/14/17                2.95%    5/17/18

1.32%      7/6/16                   2.10%    6/14/17                3.13%    5/18/18

2.09%     7/11/16                 2.68%    6/26/17                3.26%    5/18/18

-Source: Bloomberg

 

Owners of ten year US Treasuries in July 2016 have watched the yield on their note increase an astonishing 181 basis points, for a 13 percent price decline in the note’s value (vis-à-vis the Treasury 1.625% 5/15/26). For owners of the bellwether thirty year bond, the 117 basis point increase in yield has lowered the bond’s value about 23 percent (vis-à-vis the Treasury 2.50% 5/15/46).  All treasury prices per Bloomberg.

Double digit loses in longer-term treasury prices over the past two years are huge. Yet even at the most recent high yields lately of 2.60% to 3.26%, they continue to look low by historical standards.  With double digit price damage occurring at what many folks consider “low yields,” it should prepare bond investors for continued and greater carnage as yields continue their (so far) slow movement to more “normal” interest rates. (more…)

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…)

Not The Same As The Old Year

January 11th, 2018 by Kurt L. Smith

Happy 2018 to you and yours! I hope 2017 was a good year for you and may 2018 be wonderful.

One always tries to keep the wind at your back and this appears to be the consensus with investors. Optimism is extremely high and the business press (and stock market performance) reflects this sentiment.

This is the definition of trend. To be the trend it must show general tendency AND it needs to continue long enough to get noticed. The trend is your friend because you are an investor, not a trader. The trend can provide you sound grounding to make decisions as well as a framework for what may come.

These past several months we have discussed the next move in the continuing trend for bonds as well as a change in the trend for stocks. Bonds hit their high in price (low in yield) on September 8th. Since then, rates have slowly risen, while I believed they would move up faster. The ten year US Treasury was 2.01% in September, a 2.47% high in November and a new 2.50% high in December. Two year treasuries were 1.25% in September, 1.78% higher in November and a new 1.92% high in December and 1.97% this past week.

The reason I continue to write about bond yields is because it is important to know the trend. I marked the end of the bond bull market back in 2012. Buyers of long-term bonds back in 2012 invested in low yields, their current bond value is less to boot as rates have risen and bond prices have fallen. (more…)

Top of Tops

November 6th, 2017 by Kurt L. Smith

Relish in all of the good news? Certainly you must be joking? All-time highs for stocks and bond yields seemingly at low-forever yields (meaning high forever prices) and I want to rain on this parade? In a word, just one word, yes!

The reason why I have been keeping you apprised of the albeit slow changes in the bond market is because the trend change is beyond important: it is generational. Who knew that the next and most impactful move in the bond market would also occur at the all-time high for stock prices?

We have been keeping score vis-à-vis the ten year US Treasury note. Indeed the note did hit a low of 2.01% on September 8th and yields hit 2.47% on October 27th. Not the radical change I had predicted last month, but not bad and moving in the right direction.

I am focused on bonds and the bond market as reflected by yields on the ten year treasury. We can also look at the bellwether thirty year which should be at a low here at 2.85% up from 2.63% on September 8th. These low yields certainly fit the narrative of low yields. They will not remain low for much longer; certainly not forever. (more…)

NEWS FEED

The $247 trillion global debt bomb washingtonpost.com/opinions/the-2…