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Demand is strong, supply is weak, and spreads on other fixed income sectors are tight. This is not indicative of the bear market; it is the last gasp remnant of the bull market.

As The Bull Turns

August 29th, 2023 by Kurt L. Smith
  • Our watch of longer-term US treasury bond prices has shown treasuries to be the leader in the new bond bear market. Our stance has been that the move up in bond prices from the October 2022 low was merely a correction. Indeed, bond prices gradually weakened over the past six months to within spitting distance of the October lows. In August we saw longer term treasury bond prices break those lows.

    Ten-year treasury notes are trading at the lowest prices since 2007 and the thirty-year bellwether treasury bond is at the lowest level since 2011 (all prices and yields per Bloomberg). Bloomberg ran a chart headline last week saying, “Great Bond Bull Market Ends.” You have known this for years; we pronounced it in our March 2020 letter.

    Leadership is great but it also must be heeded. We live in a bull, bull, bull, bull, world, and other markets have been slower to recognize the bull market is over and the bear market is here. Believers and buyers of corporate and municipal bonds abound, not wanting to miss yields that have not been seen in, literally, decades. Demand is strong, supply is weak, and spreads on other fixed income sectors are tight. This is not indicative of the bear market; it is the last gasp remnant of the bull market.

    Bloomberg’s Joe Mysak wrote on August 22nd that “yields on top-rated municipal bonds maturing in ten years begin the day at 2.8516%. At 66% of comparably maturing US Treasuries, munis are very expensive.” With yields on treasuries continuing to rise to new highs and prices sliding to new lows we know to stay away. Mr. Mysak’s index is now 2.8874% to begin August 28th, still below October 2022’s high of 3.3939%. Progress, but generic top-rated municipal yields should continue higher.

    The inverted yield curve with lower long-term yields than shorter term maturities mean you must pay a premium (accept less yield) when buying some maturities. For those buying these inverted maturities, they amount to a bullish bet that bonds will rally. Progress is happening there as well. Last month, yields bottomed out at 2.80% on the Bonham school bond scale, 35 basis points below their two year maturity. Below, the Celina school bonds bottom at 3.29% for seven years, just 20 basis points below the two year. This flattening, as well as higher overall yields, is another indication the bull market grasp is slipping in municipals, albeit slower than treasuries.

    Yet within all the bull, bull, bull, bull, in the marketplace, bonds did not rally. The rally failed. Treasury investors have seemingly thrown in the towel; the rally from last October’s low was not a buying opportunity after all; it was a selling opportunity for the portfolio managers to shorten their bond portfolio duration. From my vantage point, few did. Bullishness blinded them from action and emboldened their belief that owning long term bonds will somehow boost their portfolio’s performance.

    Obviously, bullishness does not equate to strong positive performance. This is also true for stocks. US Investor Sentiment as surveyed by AAII (per Bloomberg), hit a two year-plus high on July 20. Yet despite such bullishness, stocks have failed to reach the new highs they were near. Perhaps, like bonds, the upward correction from the October 2022 lows might also just be a correction, rather than the buying opportunity the bulls continue to cheerlead.

    Stocks within spitting distance of new highs have reversed course. Bonds within spitting distance of new lows fulfilled their bear market trend and are trading at new lows. Will municipals and corporates follow? Bullishness remains in those markets but the idea of owning municipals just for the sake of owning municipals while treasury bonds offer even higher yields is becoming a bigger bet. Like deciding that one should accept less yield on a 10 year note than a 10 month one. These bets ignore the trend.

    The performance of longer-term treasury bonds is by far the greatest evidence of the bond bear market. My favorite bellwether to watch is the 1.25% of May 15th, 2050. From a premium of 102 on August 6, 2020, to a 49 low October 24, 2022, the price of this bond collapsed over 50%. The correction rebound was swift to 60 just weeks later and as recently as April 6. But since then, prices traded again below 50. This is what happens in the bond bear market, and it is the new trend after forty-plus years of bull. Remember, these are bonds they will mature. The same cannot be said for stocks, real estate, and other commodities or packages of investments. The bear is here. It is real and it must be faced.

    Here at The Select ApproachTM, little of what we do is generic. By specializing in municipal bonds, we are not limited to hundreds of bonds or even thousands of bonds, but rather we sift through tens of thousands of bonds looking for opportunities in this market. In the municipal bond market, it only takes one seller of the bond we want to make an opportunity. These opportunities happen.

    Celina Independent School District, TX

    Unlimited Tax School Building Bonds, Series 2023

    Aaa (Aa3 Under) Moody’s  AAA (A+ Under) S&P

    Permanent School Fund Guaranteed

    Due 2/15   Dated 9/1/23 Maturity 2/15/53

    $99,470,000 Sold

    Years   Maturity           Coupon      Yield*

    2         2025             5.00%           3.49%

    3         2026             5.00%           3.40%

    4         2027             5.00%           3.28%

    5         2028             5.00%           3.28%

    6         2029             5.00%           3.32%

    7         2030             5.00%           3.29%

    8         2031             5.00%           3.35%

    9         2032             5.00%           3.39%

    10         2033           5.00%           3.45%

    11          2034**       5.00%           3.51%

    12          2035**        5.00%           3.53%

    13          2036**        5.00%           3.64%

    14          2037**        5.00%           3.76%

    15          2038**        5.00%           3.88%

    16          2039**       5.00%           3.96%

    17          2040**       5.00%           4.01%

    18          2041**       5.00%           4.08%

    19          2042**       5.00%           4.12%

    20          2043**       5.00%           4.16%

    24          2047**       5.00%           4.31%

    30          2053**       4.00%           4.60%                

    *Yield to Worst (Call or Maturity) ** Call 8/15/33

    Source: Bloomberg

    This is an example of a new issue priced the week of 8/21/23

    Prices, yields and availability subject to change


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