Wild Swing

Over the past couple of months, this letter has focused on potential changes that may be developing in the markets. Periods of low volatility can sometimes be followed by increased volatility, and there are indications that broader trends maybe evolving. Recent movements in financial asset prices have drawn greater attention from investors, highlighting the importance of staying informed and evaluating portfolio positioning.

While some stock indices have declined approximately ten percent, my primary focus remains on bonds. Bond prices experienced significant declines in prior years, with long-term US treasury bellwether bonds declining over fifty percent from 2020 to 2023. Since then, a subsequent period of correction (higher prices and lower yields) appeared to support expectations among some market participants that interest rates might trend toward lower over time, although the outlook remains uncertain.

Whoops! Bonds are declining in price right along with other financial assets. In this environment, bonds have not consistently provided the level of diversification some investors expect, and in certain periods have lagged equity performance. These developments have prompted investors to reassess the role of fixed income within a diversified portfolio. and begging some to ask the question “Why do we own bonds?”

Yet this is the question investors continue to fail to ask. Rather than ask the hard question, there can be a tendency for investors to hold on to the optimism that many on Wall Street are there to sell them: bonds will recover and they should be ready for the double digit gains that longer duration may offer them.

In our view, the band wagoning days of bonds have been over for years. The new trend is set and investors betting against the trend will, in my opinion, become poorer for the experience.

Earlier this year, some municipal bond investors thought perhaps staying with shorter terms might be the thing to do. As the demand for these securities increased, it highlighted how pricing in the municipal bond market can become dislocated under strong buying pressure. It is the new issue market where portfolio managers attempt to fill their orders. For example. Bloomberg’s data showed the two-year AAA Municipal Bond curve hit approximately 2% at the end of February, while the five-year curve hit 2.07%. And if those rates were not silly enough, new deals in high demand states with lots of billionaires, like California, saw yields priced well below the curve: a Pasadena AA+ refunding deal on March 5 was priced roughly 34 basis points below the curve for two years and 30 basis points below for five years.

One challenge in the municipal bond market is the market does not scale. If you need to invest a few billion you are at the whim of the primary new issue market to meet allocation needs. This is not unusual across portfolio managers, as periods of strong demand can influence pricing and availability in new issues. As a result, performance outcomes among municipal bond strategies may at times appear similar, reflecting shared exposure to these market conditions.

Interest rates moved higher during the period, making March 2026 the worst for municipal bond performance since September 2023. The two-year and five-year scales above each jumped fifty basis points before the month ended; perhaps Pasadena bond buyers fared even worse. In the municipal bond market, thinking you are doing the right thing is not easy to execute. That is because municipal bonds do not scale; you cannot turn small into large without consequences. Investors may feel silly now but not as silly as looking at greater losses on the longer bonds in their portfolio. At least they got their bonds!

Buying shorter term bonds with yields below 2% is unlikely to generate significantly higher returns in the current environment. Choosing shorter term bonds reflects a cautious view regarding expectations for future interest rates. While we share the view that interest rates may remain elevated, The Select Approach^TM employs strategies designed to seek more favorable risk-adjusted outcomes, emphasizing the potential for income generation at the time of purchase. Unlike certain other financial assets, where returns are largely realized when you sell, fixed income investments can generate value immediately through their yield. While that is not the case in decades long bull markets, it is the case once the trend changes.

The end of the bond market correction in the first quarter of this year presents challenges for municipal bond investors who believe scaling works to achieve desired outcomes. Weakening financial asset prices, particularly bonds, can devastate performance numbers. The favorable bond market correction (for performance) is now back to the unfavorable trend. Wall Street’s cheerleading of lower interest rates in the future led to investors doubling down on longer-term bonds in the hopes of recovering the losses of 2020 through 2023. It is better to sell hope than to admit that the trend has changed. Besides, it is not Wall Street’s money, it is yours. You deserve better and you have the opportunity to do better when you work with us.

Austin TX Water & Wastewater Revenue Refunding and Improvement Bonds Series 2026

Aa2 Moody AA S&P AA- Fitch (All Underlying)

Due 11/15 Dated 4/21/26 Maturity 11/15/55

$540,445,000 Sold

Years Maturity Coupon Yield*

1 2027 5.00% 2.50%

2 2028 5.00% 2.58%

3 2029 5.00% 2.66%

4 2030 5.00% 2.76%

5 2031 5.00% 2.89%

6 2032 5.00% 3.04%

7 2033 5.00% 3.11%

8 2034 5.00% 3.21%

9 2035 5.00% 3.33%

10 2036 5.00% 3.42%

11 2037** 5.00% 3.55%

12 2038** 5.00% 3.67%

13 2039** 5.00% 3.78%

14 2040** 5.00% 3.81%

15 2041** 5.00% 3.88%

16 2042** 5.00% 3.95%

17 2043** 5.00% 4.04%

18 2044** 5.00% 4.16%

19 2045** 5.00% 4.25%

20 2046** 5.00% 4.34%

21 2047** 5.00% 4.49%

22 2048** 5.00% 4.58%

23 2049** 5.00% 4.63%

25 2051** 5.00% 4.66%

29 2055** 5.25% 4.70%

29 2055** 5.00% 4.75%

*Yield to Worst (Call or Maturity) **Callable 5/15/36

Source: Bloomberg

This is an example of a new issue priced the week of 3/23/26. Provided for illustrative purposes only and is not a recommendation to buy or sell any specific investment.

Illustrative examples may not reflect actual transactions, investor results, or available investment opportunities.

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.