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Posts Tagged ‘treasury bond’

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.

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Bonds Reverse on News

October 28th, 2024 by Kurt L. Smith

The Federal Reserve’s September 18th rate cut was the news. This move followed excitement for the cut as three-month treasury bill yields moved from about 5.40% in July to 4.75% on the 18th. Six-month treasury bills moved from 5.30% to about 4.50% in the same time frame (all yields and prices per Bloomberg). The Fed merely followed the markets, as expected.

While the short-term interest rates have largely held in since the cut, longer term bonds have tanked. Sell on the news indeed! Our bellwether poster child, the US treasury bond 1.25% of May 15, 2050, sold at just over 56 on September 17th and below 50 today, October 25th. This is essentially the same level the bond traded at on October 24th, 2022.

It is difficult to make money in a bear market. The first step needed is to recognize that this is the trend. We reached this point years ago, back in 2020 when the bellwether sold at twice its current price, near par. Most investors have failed to recognize this first step. They have done what most investors have done: they held and/or doubled down. Unfortunately, with respect to bonds, they have not held bonds which have treated them well.

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Is This It?

September 25th, 2024 by Kurt L. Smith

For about eleven months now, bonds have traded higher in price and lower in yield in the most recent correction of the nascent bond bear market. From near 0% interest rates in 2020 to over 5% in 2023 in longer US treasury notes (below 0% to 5.50% for treasury bills), corrections are natural movements in how trends are developed.

While bond prices have rallied, we have also seen stocks hitting new highs as well. Even the Federal Reserve jumped on the bandwagon cutting rates this week to fulfill the promise made last month.

Yet for so much time, for so much work, the rebound in bonds looks pathetic. Most, if not all, of the rally occurred in the final nine weeks of last year. Our favorite long treasury bond, the 1.25% of May 15, 2050, traded at 43.25 on October 20th, 2023, and just over 55 on December 28th, weeks later. That’s a nice 27% gain for prescient traders, but a far cry from the 102 on August 6th, 2020 (all prices and yields per Bloomberg). This is what a bond bear market looks like.

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Change Appears At Hand

July 31st, 2024 by Kurt L. Smith

In April my letter examined whether the Federal Reserve would begin cutting rates. Optimism abounded as the ten-year treasury note yield fell from 5% to 3.88% (prices rose) in the fourth quarter of 2023 (all prices and yields per Bloomberg). By April such optimism had taken a hit as higher yields (lower prices) left the bond market correction hanging on by a thread.

Since October of last year, the treasury market has been in a correction. From near 0% (0.31%) in March 2020 to 5% on ten-year treasury notes, the market was due, if not overdue, for a correction. Short term treasury bills had seen a similar run from negative yields on the six-month treasury bill in March 2020 to 5.59% in August of last year, with most of the move happening in the preceding twenty months.

The bond market correction has not only hung in, but treasury bills (three months and six months) hit their lowest yield (highest price) in the correction last week, completing an A-B-C correction. Three-month bills moved from 5.51% on October 6th to 5.28% this week, while six-month bills went from 5.59% to 5.12%. A ten month correction of a twenty month move? One can make an argument that short term treasury bills next move from here is toward higher interest rates not lower.

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Rate Cuts? Not So Fast (Obviously)

April 3rd, 2024 by Kurt L. Smith

Writing about market corrections is hardly exciting. Investors want to know where a market is going and when. The exciting part is when forward steps are being taken, not the times when the market takes a step back.

After almost forty years of making headway towards lower and lower yields, the market has reversed from 2020 to 2023 as yields rose from near zero to something substantial. Ten-year treasury note yields went from .31% March 9, 2020 to 5.02% on October 23, 2023 (yields and prices per Bloomberg). Shorter term yields, like three-month treasury bills, were negative in March 2020, rising to 5.51% last October 6th.

These were many steps forward in the new trend of higher yields and lower bond prices. But markets do not move in straight lines. A trending market needs to correct, taking a step, or maybe steps, back.

Here is the bad news. Corrections allow the trend to continue. From October 23rd to December 27th, the ten-year treasury yield fell from 5.02% to 3.78%. This correction generated a lot of excitement, particularly from those investors who own long term bonds at substantially higher prices purchased when rates were low. Lower yields boosted longer bond prices in the process.

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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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Manic Market?

January 3rd, 2024 by Kurt L. Smith

I have been tempted through the years to write my letter as “just like last month.” It certainly could apply this month. Treasury bond prices, as well as stock prices, are on a tear. Municipal and corporate bonds are right there with them. Everyone, it seems, has moved to one side of the boat.

This is the time of year for the pundits. Review 2023, predict 2024, we were right, they were wrong…it is an annual event. It is also a time to revisit perspective.

Over the past six months, longer-term interest rates, such as the ten-year US treasury note, rose from 3.85% on July 3rd to 5.02% on October 23rd and now back to 3.85% today, December 29th (all prices and yields per Bloomberg). For a price perspective, the newest ten-year US treasury note for the period, the 3.375% of May 15th, 2033, sold at 96, 88 and now back to 96 over the same six-month timeframe. These are nice juicy moves for traders, but who is a trader?

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It Was The Best Of Times

November 27th, 2023 by Kurt L. Smith

The holidays are upon us with the words of Charles Dickens usually coming from a stage near you, though these words are not from his A Christmas Carol. The opening line from A Tale Of Two Cities could also describe bond buyers here in the opening weeks of November.

The month began with ten-year U.S. Treasury note yields near 5% at 4.93%, just below a sixteen year high of 5.02% on October 23rd (all yields and prices per Bloomberg). For owners of long duration bonds, it has certainly been the worst of times of late. For those ready to take the plunge and buy at these high yields and low prices, it may be the best of times.

A mere three weeks later and yields have plunged, or at least dropped a bunch, to below 4.40% on November 17th. Hurry, before you miss out! But as a point of reference, 4.40% is also a sixteen year high for the treasury’s ten-year note, save the last three months.

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For What It’s Worth

October 20th, 2023 by Kurt L. Smith

There’s somethin’ happenin’ here

But what it is ain’t exactly clear

There’s a man with a gun over there

A-tellin’ me I got to beware

I think it’s time we stop

Children, what’s that sound?

Everybody look what going down

–Opening lyrics by Stephen Stills, performed by Buffalo Springfield

Stills wrote this song in late 1966 and it became a hit in 1967. According to Wikipedia, Stills “was inspired to write the song because of the Sunset Strip curfew riots in Los Angeles in November 1966.” That year saw the first substantial decline of the Go-Go stock market of the 1960s as stock prices had almost doubled from a 535 Dow Jones Industrial in 1962 to 995 in early 1966 (all prices/yields per Bloomberg). The correction that began in 1966 endured for over fifteen years until our forty-plus year stock bull market finally shattered the Dow 1000 level for good in 1982. Adjusting for inflation rampant in the 1970s, it took many more years than that to get back to the 1966 stock market high.

We have had our own riots of late, many associated with Black Lives Matter following the murder of George Floyd in 2020. But with stocks recovering from their 2020 Covid Correction to new highs in late 2021 and early 2022, we have generally seen relative calm. That was two years ago, making the latest stock correction sideways (so far), similar to the late 1960s. Somethin’ happenin’ here, But what it is ain’t exactly clear.

What is clear is bonds are taking a beating. Long term bonds have lost ten, twenty, thirty, forty and even over fifty-plus percent of their value since their 2020 price highs. Banks own trillions of dollars of underwater bonds, but don’t you worry. Here in the US banks can deem their bonds as long-term holdings so they don’t have to write off any losses against them. For the banks and those who invest in them, willingly or unwillingly, there is hope.

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