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Posts Tagged ‘treasury bond’

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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Bear Market Reasserts Itself

February 28th, 2023 by Kurt L. Smith

Last month’s letter posited the correction in both stock and bond markets was over. The price action in February has indicated that to be the case.

Investors piled into both markets to begin the year; they have hope on their side. The bond market correction in two-year US treasury notes took it from 4.80% on November 4th to 4.03% on January 19th (all yields per Bloomberg). On February 24th the note traded at 4.84%, a complete reversal of the correction.

The ten-year US treasury note traded at a multi-year high of 4.33% on October 21, 2022, beginning it correction. Three months later it was 3.32% on January 19th when the correction ended, jumping to 3.98% on February 27th. While not as a dramatic reversal as the two-year note, the ten-year note has traded at a higher yield levels in fifteen of the last seventeen trading days through February 27th.

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Correction Over

January 30th, 2023 by Kurt L. Smith

Yes, the correction in both stocks and bonds is now over. For the past forty-or-so years that would have been a good thing. But in a bear market, the end of a correction should be foreboding as the trend to lower prices reasserts itself.

As in the past several years, U.S. treasury bonds are taking the leadership position. After many months of weakness in 2021 and 2022, the correction in bonds began in November as treasury prices across all maturities began to rally. Oftentimes, corrections in a bear market can seemingly occur on a dime and suddenly thrust prices higher. The correction lasted until the middle of January and now the bear trend should reassert itself.

It is the municipal market, of all places, where we can see the correction at its fullest. Last year was among the worst ever for bond market performance but even horrible markets correct. Beginning in mid-November, prices on treasuries leapt upwards and yields, which had been moving higher, suddenly plunged lower.

Municipal bonds are a spread product. Investors buy them because the tax exemption gives them a higher net yield after taxes. So, it would make sense that municipal bonds would rally in the correction like the prices of US treasury securities.

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Not Matching Expectations

December 20th, 2022 by Kurt L. Smith

In the hustle and bustle of the season, we would expect no less in a bull, bull, bull world. Our experience matches our expectations. Such is not the case with the financial markets.

While we are a couple weeks away from posting final 2022 results, the bull, bull, bull world has failed to deliver results. Depending on your yardstick of choice, you might categorize the results as poor, bad, or even horrific. Yet we cannot blame investors for not trying: the rally in both stocks and bonds from October to early December appeared to have legs…until it did not.

There is a reason for this expectation/performance mismatch, and it is not inflation. The reason is the bull market is over. And while stock investors may continue to believe they have seen this movie before, bond investors are surprisingly acting the same way.

Nowhere is the bull, bull, bull world more apparent than in the world of bonds. One example is in spreads. In writing about the treasury market, Jeff Sommer at the New York Times says “this has been an awful year for U.S. bonds — so bad that 2022 may end up as the worst calendar year in history.” Maybe that explains how Idaho Housing sold its 4.384% taxable municipal at 11 basis points below treasury yields (higher priced) last week (per Bloomberg). The bond is not a treasury! Idaho Housing bonds due six months later sold to the spread of seven basis points. Yeehaw! A lack of spread to treasuries is very bull, bull, bull.

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It’s A Bull, Bull, Bull World

November 30th, 2022 by Kurt L. Smith

After forty years of bull market in financial assets, one can only imagine how difficult a change in trend may be to recognize. We live in a bull market world, enjoy the bull market experience and we have been doing so, for so long, we believe it is just the way things are.

The bull market has existed for both stocks and bonds for decades. Rather than serve to diversify one’s portfolio, stocks and bonds have been in a tortoise/hare race to the top. Unlimited optimism, or even abundant optimism, can only push bond prices so high, but for stocks, truly the sky was the limit.

So, it might make sense that the bond market might be the first to signal the bull market is over. The bond market performance story for 2022 has not yet been fully written, but unprecedented, the word used in these letters over the past several months, will surely be included.

Yet despite a treasury bond trading at half its value over a two-plus-year span, you would think investors would recognize this as a bond bear market. Staring at not only the worst bond market return in decades, but perhaps ever, we saw bond prices soar in November with Bloomberg saying last week “municipal bonds are having their best month in almost four decades.”

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The Madness of Crowds

November 4th, 2022 by Kurt L. Smith

Several weeks after my March 2020 letter calling the end of the multi decade bull market in bonds, the US treasury sold $22 billion in 1.25% treasury bonds due May 15th, 2050, at a slight discount. In August 2020 those bonds sold at a slight premium and on October 21st, 2022, the same bond sold at below fifty cents on the dollar (all prices per Bloomberg).

The crowd, rather than sell at the top in 2020, instead chose to buy. This is the madness of crowds. Since 2020 my experience in the marketplace tells me that few have chosen to sell bonds. Treasury bonds, like stocks, are priced based on the last trade. It does not take a large quantity of bonds to set a new price. It may not involve many trades at all. But now, a mere two years and two months later, 50% of the value of this bond has been wiped out.

In the annual running of the bulls (actual bulls versus the financial creature) in Pamplona Spain, the crowd can serve as protection. Bull markets are like that, as rising tides do float most ships, and after almost four decades of bull markets investors may be forgiven for not remembering what a bear market cycle looks like. In contrast, bear markets do not afford the crowd such protection and investors are likely to be gored as we have seen in buyers of the 2050 treasury bond.

Selection does matter, but more important is identifying a bear market. I was serious about my March 2020 letter, and I hope you received it as such. The multi-decade bond bull market (like all bull markets) was always going to end. We just did not know when. The reason I chose to specialize in municipal bonds is I saw a market that offered my clients a unique opportunity in both bull and bond bear markets.

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Merely Gaining Steam

April 28th, 2022 by Kurt L. Smith

Last month I discussed whether the bond bear market had finished its first leg down or was it merely gaining steam. Over the past few weeks, we got an answer to that question.

I also discussed the importance of stocks moving to new highs or there is a risk for a larger correction. What is a larger correction? I believe we can place Netflix (NFLX – NASDAQ) as the new poster child for the definition of larger correction. At its recent price of $193.50 on April 27, 2022 (all prices and yields per Bloomberg), Netflix is down 72% from its all-time high of $700 set just five months earlier on November 11, 2021. Again, merely gaining steam.

The “What, me worry?” crowd continues to fiddle while Rome burns. The losses in bellwether US treasury notes and bonds over the past several months is unprecedented. The losses in the NASDAQ for April 2022 may be among the worst months ever. 3% mortgages are now 5% mortgages and inflation is, pick a number, 8%?

My get-out-of-bonds mantra for the past two years has now morphed into get-out-of stocks. Normalcy was exceeded months ago and is now moving toward extreme, yet capitulation evades us. Instead, we are looking at wave after wave of continued downward prices for financial assets.

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Worst Quarter Since 1973

March 30th, 2022 by Kurt L. Smith

Bloomberg published this line on March 22nd as their US Treasury Index had lost 5.55% since year end, surpassing the 5.45% loss at the beginning of 1980, the biggest quarterly decline since their index was created. In the middle of the bond bear market’s first move, this type of poor performance is to be expected.

Some people look at the bond market’s performance as the tortoise versus the stock market’s hare. Every day, bond investors look into the mirror (at bond performance) and it looks as if little has changed. Here, in the early stages of the bond bear market, nothing could be further from the truth.

The yields on the risk-free US treasury bellwethers we track have soared over the past two years. The 1.5% treasury note of February 15, 2030, sold at a .31% yield (111-19) on March 9, 2020 (all yields/prices per Bloomberg). This past week that note traded at 2.52% (92-23). This is an almost 19-point loss or 17% on the bellwether ten-year treasury note. Longer maturities fared far worse. Our bellwether is the 2.375% of November 15, 2049, and it sold at .70% or 140-17 on March 9, 2020. Last week this bond sold at 2.67% (94-09) for a 46-point loss or 33% of value.

Bond bear market? I do not recall reading that headline in the New York Times or splashed across magazine covers of late. But a dribble here and a dribble there while looking in the mirror has eroded significant values in the risk-free-rate US treasury market.

Almost all this price erosion happened before the Federal Reserve hiked interest rates. That did not happen until March 16th. So much for fed leadership; how’s that for Fed response?

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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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Streaks End

November 30th, 2021 by Kurt L. Smith

Streaks don’t last forever. This past weekend in college football proved that. The college football playoffs this year will not include Clemson, Ohio State or Oklahoma. Despite all reason, the best talent, and the fact we all love winners, the playoff runs for these schools has ended. Only Alabama’s hope remains. 

Time will tell whether this is but a minor setback for these perennial powerhouses or one of long-lasting stature. I know the differences. I am a (now) long suffering Texas Longhorn fan. 

I also called the end of the bond bull market as March 6, 2000. An almost forty-year winning streak for the bond market is now over, yet many do not share my certitude, even after twenty-one ridiculously long months. 

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