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Archive for the ‘Municipal Market Letter’ Category

For What It’s Worth

October 20th, 2023 by Kurt L. Smith

There’s somethin’ happenin’ here

But what it is ain’t exactly clear

There’s a man with a gun over there

A-tellin’ me I got to beware

I think it’s time we stop

Children, what’s that sound?

Everybody look what going down

–Opening lyrics by Stephen Stills, performed by Buffalo Springfield

Stills wrote this song in late 1966 and it became a hit in 1967. According to Wikipedia, Stills “was inspired to write the song because of the Sunset Strip curfew riots in Los Angeles in November 1966.” That year saw the first substantial decline of the Go-Go stock market of the 1960s as stock prices had almost doubled from a 535 Dow Jones Industrial in 1962 to 995 in early 1966 (all prices/yields per Bloomberg). The correction that began in 1966 endured for over fifteen years until our forty-plus year stock bull market finally shattered the Dow 1000 level for good in 1982. Adjusting for inflation rampant in the 1970s, it took many more years than that to get back to the 1966 stock market high.

We have had our own riots of late, many associated with Black Lives Matter following the murder of George Floyd in 2020. But with stocks recovering from their 2020 Covid Correction to new highs in late 2021 and early 2022, we have generally seen relative calm. That was two years ago, making the latest stock correction sideways (so far), similar to the late 1960s. Somethin’ happenin’ here, But what it is ain’t exactly clear.

What is clear is bonds are taking a beating. Long term bonds have lost ten, twenty, thirty, forty and even over fifty-plus percent of their value since their 2020 price highs. Banks own trillions of dollars of underwater bonds, but don’t you worry. Here in the US banks can deem their bonds as long-term holdings so they don’t have to write off any losses against them. For the banks and those who invest in them, willingly or unwillingly, there is hope.

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Slow-Moving Trainwreck Over

September 22nd, 2023 by Kurt L. Smith

Today, September 21st marks the official end of the bond market correction that began last fall. Bloomberg’s US Generic Government thirty-year yield index hit 4.57% (all yield and prices per Bloomberg), the highest since 2011. Their ten-year index hit 4.50%, the highest since 2007. The two-year version of the index hit 5.20%, the highest since 2006, and within range of 5.35%, which would be the highest since 2000. The treasury market had been within spitting distance of this breakdown for weeks, as followed in previous letters.

The slow-moving portion of the financial markets, however, belongs to stocks, which are currently trading at the same levels as over two years ago (pick whichever index you like; the story is the same). The bullishness we have witnessed over the past many months has not resulted in higher prices, but instead lower ones. As the reality sets in that the correction in prices since last fall is slipping away (the slow-moving train wreck), expect the price plunge to accelerate as stocks join their highly correlated bond brethren in the continuation of the bear market.

Real economic damage has occurred already. My favorite bellwether US treasury bond, the 1.25% of May 15, 2050, traded at a new low of 48.5 today after trading over 102 three years ago on August 6, 2020. With treasuries of all maturities trading at twelve-plus-year lows, it appears that almost all bond portfolios are underwater, with those portfolios of longer duration significantly underwater. The last time long term bond prices were this low, last October, First Republic Bank, Silicon Valley Bank and Signature Bank collapsed months later. These were three of the four largest US bank collapses in history.

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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.

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Everyone Is A Bull

July 26th, 2023 by Kurt L. Smith

Month after month after month of seemingly never-ending higher prices has galvanized almost everyone as a bull. Last October’s low prices seem to be long forgotten. Let the good times roll! Of course, I am talking about the bond market.

The bond market is every bit as bullish now as the stock market. The bond market gave up its role as market arbiter so long ago most investors no longer know (or care) that bond investors were once considered voice of reason (or the alarmists in the room). Bond vigilantes in Wikipedia refer to the Clinton, and later, Obama administration. Certainly, they are no longer relevant, even if they existed…they long became bond market bulls, like everyone else.

The bond market is so big, and it has performed like a bull for so long, every manager’s bond portfolio essentially looks alike: a portfolio chock full of duration because that is where long-term performance has been made. After all, it is a bull market world out there and everyone seems to know it.

Portfolio managers cannot afford to sell bonds that have performed almost every single year and of course this year their performance has been nothing but up. So, ride the bull wave just like their stock investing brethren.

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Sideways Breaking Down

July 6th, 2023 by Kurt L. Smith

Last month we focused on the performance of the municipal bond market. We asked the question: would the market’s sideways trading action continue or would the higher rates we saw in May continue for municipal bonds? Municipals bond prices bounced (their rates fell) and, once again, sideways continued for municipals. But it is the leadership of the shorter-term U.S. Treasury market that is on the move.

One year treasury bill yields also weakened in May, trading at a new high of 5.27% on May 26th (all prices and yields per Bloomberg). Another reason this move was significant is because this yield exceeded the previous high of 5.23% on March 8th, just as the so far, short-lived, banking crisis erupted, liquidity rushed in and days later the bill traded at 3.83% on March 16th. The correction in short term treasuries is now over.

June did not turn out to be much in terms of new territory for bonds until the final days of the month. One year treasury bills hit another new high of 5.43%, while two-year treasuries traded at 4.93%, spitting distance from their high of 5.08% set, you guessed it, March 8th. Even ten-year treasuries traded at their highest yield since March at 3.89% versus 4.09% in March.

The leadership in rising interest rates demonstrated by the new highs in treasury yields (new lows in prices) or knocking at the door of new high in yields is important. As optimistic as the world seems to be a bear market in bonds, particularly a bear market on the move, is not in the narrative. The rise in treasury yields appears to be narrative busters.

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Still Zig Zagging Away

June 3rd, 2023 by Kurt L. Smith

According to Bloomberg’s Nic Querolo, municipal bonds lost 1.38% for the month through late May, which would make it the worst May performance since 1986’s 1.63% loss. Querolo goes on to say May has been the strongest month for municipal performance over the past ten years at up .9% on average.

While I place the beginning of the bond bear market in March 2020, municipal bonds did not peak until August 4, 2021, per Bloomberg, selling off into the first leg of the bear market October 26, 2022 with a 13.4% decline in the Bloomberg Municipal Bond Total Return Index.

The correction since late September/early October has occurred for many, if not all, asset classes, municipals included. It was the correction’s peak in April that set up municipal bonds dreadful May.

We are still in correction territory and unfortunately (for traders), that is a tough place to be. February was a dreadful month for municipals as well but the bond market’s response to the bank failures in early March sent prices to new correction highs (new yield lows). Will we see another move to new correction price highs or is a tough May the precursor of higher yields yet to come?

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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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Bond Portfolio Blunders

April 3rd, 2023 by Kurt L. Smith

It is hard to fathom a $42 billion run on a bank. In one day, no less (source: State of California). One thing for sure, the dollars are bigger now. No longer do you need to stand in line to get your money from your bank. Zap, you can move it. Bang, the doors of the bank are shut. Just another day (or weekend) in our financial life.

Silicon Valley Bank (SVB-NYSE) did what any rational investor would do, realizing the bond market was in a bear. It sold. Not at the bottom in October, but in March, during the bond bear market correction. As I have said on these pages, a correction, particularly the end of a correction, is a good time to sell.

SVB had a plan and it hired Goldman Sachs to help implement it (source: Rueters). Sell $24 billion in bonds, mostly U.S. Treasury securities, for $21.45 billion. Considering 2022 was the worst year for bond market performance in the history of history, the losses could have been much worse. Goldman also advised the bank on a $2.25 billion capital raise to replace the bond loss. A prudent plan, it sure appeared.

No bank can survive a run on its deposits. Prudently run bank or otherwise, a bank run leads to a closed bank. So that is what the state of California did. The bank was closed. Now what?

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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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NEWS FEED

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