Bonds Reverse on News

The Federal Reserve’s September 18^th 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 18^th. 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 17^th and below 50 today, October 25^th. This is essentially the same level the bond traded at on October 24^th, 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.

The sudden shift in the marketplace for longer term bonds is also being felt in the municipal bond market. This week Bloomberg reported two deals postponed due to market conditions: a $102 million Ohio Water Development Authority and a $1 billion-plus California Community Choice deal. The Ten-year Bloomberg AAA benchmark yield has jumped nearly 50 basis points in yield from 2.56% on October 3^rd to 3.02% on October 23^rd. This quick, strong move, coming on the heels of the Federal Reserve rate cut that has left the market about a 180° difference from the market we experienced earlier this summer.

We have spent many months discussing the counter trend bounce and bonds since the October 2023 lows. Watching our bellwether 1.25% bond of 2050, while sizable, it is still difficult to say that we will soon move to new lows in price (below 43.25 set October 20, 2023). But once the correction ends, I believe we will move to lower, perhaps much lower, prices and higher long-term yields. This is the forest all investors should be watching, as the trend is set, and we continue correcting our forty-year bond bull market.

All the hope and optimism of many managers and holders of long-term bonds is being tested. The seductiveness of grabbing hold of tax-free returns for the past year stands at nearly ten percent, 9.81% to be exact, per the Bloomberg Municipal Bond Index Total Return. This performance is quickly turning into a mirage as the same index stands at a mere 0.83% on a year-to-date basis. Thus was the power of the snap rally last year from October through year end but, like we have witnessed this year, it has no staying power. Those wonderful returns, and the long-term bonds that created them, have reversed course quickly over the past few weeks.

I am watching for additional danger signals here. One would be if the weakness in longer term bond prices begin to extend to stocks. Another would be if the bellwether treasury bond begins to close in on new lows near 43. We never know the exact timing, but identifying the trend was critical for us in avoiding the carnage of this first leg of the bond market bear. Similarly, I dismiss the value of bonds as a diversifier of stock risk, particularly after nearly forty years of a bond bull market and even longer for the bull market in stocks. I see value accruing to cash and bonds that behave similarly.

Comal Independent School District, TX

Unlimited Tax School Building and Refunding Bonds, Series 2024

Aa2 Moody Under (Aaa on PSF)

Due 2/15   Dated 11/1/24 Maturity 2/15/49

$465,770,000 Sold

Years   Maturity       Coupon        Yield*

1         2025             5.00%           3.34%

2         2026             5.00%           2.86%

3         2027             5.00%           2.65%

4         2028             5.00%           2.68%

5         2029             5.00%           2.74%

6         2030             5.00%           2.83%

7         2031             5.00%           2.91%

8         2032             5.00%          2.99%

9         2033             5.00%          3.07%

10       2034             5.00%          3.12%

11       2035**          5.00%          3.21%

12       2036**          5.00%          3.27%

13       2037**          5.00%          3.33%

14       2038**          5.00%          3.36%

14       2038**          3.00%          3.74%

15       2039**          3.00%          3.80%

16       2040**          3.00%          3.88%

17       2041**          3.00%          3.97%

18       2042**          3.00%          4.05%

19      2043**           3.00%          4.09%

20      2044**           5.00%          3.78%

25      2049**           4.00%          4.23%

*Yield to Worst (Call or Maturity) **Callable 2/15/34

Source: Bloomberg

This is an example of a new issue priced the week of 10/21/24

Prices, yields and availability subject to change