But Look At The Yield!

Last month I left you looking for higher rates. The ten-year treasury note had corrected from 4.80% in mid-January to 4.10% (all prices and yields per Bloomberg). The 4.10% yield on March 4th was indeed the low last week; on March 27th the yield hit 4.40%.

My point is not how to trade the ten-year treasury note. My point is performance matters. Since 2020, the trend in bonds has been down in price (up in yield). This makes performance in the bond markets very difficult. Rather than having the wind at your back (bull market), the wind is in your face.

This makes bond market corrections, as we saw earlier this year (4.80% to 4.10%), a signal for what comes next. Looking at the bigger picture, we saw 5% yields in October 2023 and 3.60% in September 2024. Understanding that those moves in rates were corrections gets us ready for what is next: still higher rates.

Higher interest rates and lower prices are easily seen in the trading of longer-term bonds. The March 2025 treasury bond future traded at 119.5 on March 4^th and below 115.5 on March 27^th. Losing four points inside of a month makes positive performance very difficult; a wind in your face.

Municipal yields also jumped comparing the Texas A&M bonds below with last month’s El Paso Water and Sewer. With individual ownership of municipal bonds at seventy percent or $3 trillion of a $4.2 trillion market, we can assume owners will continue to do what they have done: hold and buy more. This is not a recipe for success; it has certainly not been our recipe.

Unlike other fixed income markets, the municipal bond market offers opportunities for those who know where to look. Knowing the market direction is key. It is so important that many municipal bond managers choose to ignore it completely. Buy longer-term bonds, along with the higher yields they now (finally) offer and hope for the best. If interest rates move down (the old trend) their portfolios perform, along with every other manager. But if rates move higher, performance is pitiful, as has been the case over the past one year, three year and five-year periods.

The Select Approach^TM has always taken a different approach. Some bonds do perform differently than other bonds and those bonds exist in the municipal bond market. This has been my area of expertise for over 30 years.

Size of the bond markets dictate how bonds are managed. Over the past several months I have talked about how market performance is largely generic – that is, investors own the market. Investors, whether they are investing thousands, millions, or billions, will find their performance to be similar. In a bond bear market that performance will generally be lacking.

Mutual funds and exchange traded funds (ETFs) offer what appears to be differentiation. Short term, intermediate, and long term for example, are the most common. High Yield is another. But again, in a bond bear market, all these differentiations face the same wind in their face. Rising interest rates mean lower bond prices are the reality for bond investors today. Unless you do something different.

Buying individual municipal bonds, select municipal bonds, are the way to take control of your bond investments, especially in a bond bear market. It is the variety found in the municipal bond market, with tens of thousands of unique bonds (CUSIPs) that gives us this opportunity. No other bond market can compete. Best of all, we can do it without even considering high yield municipal bonds at all. This is a great thing, because in a bond bear market, high yield bonds can easily become the biggest losers of all bond categories.

We have never been through times like these. Never has so much debt (so many bonds) been outstanding and we are poised to experience the worst effects of a bond bear market.

A common narrative over the decades has been bonds provide diversification for investors. This is what I call the least-worst alternative. Favored by money managers, the least-worst alternative goes something like this: “Isn’t it great we only lost thirty percent? We could have lost fifty percent.” This is why you should not be invested in bonds now. Managed bonds are the wrong asset class in a bear market. You have an alternative, but you must act and join me there at The Select Approach^TM.

Texas A&M University System

Permanent University Fund Bonds, Series 2025A

Aaa Moody Underlying AAA Underlying S&P AAA Underlying Fitch

Due 7/1   Dated 3/15/25 Maturity 7/1/54

$379,080,000 Sold

Years   Maturity       Coupon        Yield*

0         2025             5.00%           2.79%

1         2026             5.00%           2.76%

2         2027             5.00%           2.86%

3         2028             5.00%           2.91%

4         2029             5.00%           2.97%

5         2030             5.00%           3.07%

6         2031             5.00%           3.14%

7         2032             5.00%           3.23%

8         2033             5.00%          3.30%

9         2034             5.00%          3.43%

10       2035             5.00%          3.50%

11       2036**          5.00%          3.57%

25       2050**          5.00%          4.43%

26       2051**          5.00%          4.45%

27       2052**          5.00%          4.47%

29       2054**          5.00%          4.50%

*Yield to Worst (Call or Maturity) **Callable 7/1/35

Source: Bloomberg

This is an example of a new issue priced the week of 3/24/25

Prices, yields and availability subject to change