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Archive for the ‘Municipal Market Letter’ Category

It’s A Bull, Bull, Bull World

November 30th, 2022 by Kurt L. Smith

After forty years of bull market in financial assets, one can only imagine how difficult a change in trend may be to recognize. We live in a bull market world, enjoy the bull market experience and we have been doing so, for so long, we believe it is just the way things are.

The bull market has existed for both stocks and bonds for decades. Rather than serve to diversify one’s portfolio, stocks and bonds have been in a tortoise/hare race to the top. Unlimited optimism, or even abundant optimism, can only push bond prices so high, but for stocks, truly the sky was the limit.

So, it might make sense that the bond market might be the first to signal the bull market is over. The bond market performance story for 2022 has not yet been fully written, but unprecedented, the word used in these letters over the past several months, will surely be included.

Yet despite a treasury bond trading at half its value over a two-plus-year span, you would think investors would recognize this as a bond bear market. Staring at not only the worst bond market return in decades, but perhaps ever, we saw bond prices soar in November with Bloomberg saying last week “municipal bonds are having their best month in almost four decades.”


The Madness of Crowds

November 4th, 2022 by Kurt L. Smith

Several weeks after my March 2020 letter calling the end of the multi decade bull market in bonds, the US treasury sold $22 billion in 1.25% treasury bonds due May 15th, 2050, at a slight discount. In August 2020 those bonds sold at a slight premium and on October 21st, 2022, the same bond sold at below fifty cents on the dollar (all prices per Bloomberg).

The crowd, rather than sell at the top in 2020, instead chose to buy. This is the madness of crowds. Since 2020 my experience in the marketplace tells me that few have chosen to sell bonds. Treasury bonds, like stocks, are priced based on the last trade. It does not take a large quantity of bonds to set a new price. It may not involve many trades at all. But now, a mere two years and two months later, 50% of the value of this bond has been wiped out.

In the annual running of the bulls (actual bulls versus the financial creature) in Pamplona Spain, the crowd can serve as protection. Bull markets are like that, as rising tides do float most ships, and after almost four decades of bull markets investors may be forgiven for not remembering what a bear market cycle looks like. In contrast, bear markets do not afford the crowd such protection and investors are likely to be gored as we have seen in buyers of the 2050 treasury bond.

Selection does matter, but more important is identifying a bear market. I was serious about my March 2020 letter, and I hope you received it as such. The multi-decade bond bull market (like all bull markets) was always going to end. We just did not know when. The reason I chose to specialize in municipal bonds is I saw a market that offered my clients a unique opportunity in both bull and bond bear markets.


The Need To Think Differently

September 27th, 2022 by Kurt L. Smith

We have discussed extensively characterizing this financial market as unprecedented. The bull market for bonds ended in March 2020 and all that was left was for stocks to finish their bull market run as well. This happened at the beginning of this year as we began to see unprecedented market moves in February 2022.

It is not surprising that last year was one for the ages for asset prices. One did not need to believe the bond bull market was over to enjoy a nice run up in private equity investments. Interest rates were still incredibly low allowing private equity, or leveraged equity, to trounce the performance of other asset classes. The S&P Listed Private Equity Index began 2021 at 168, hitting a high of 240 in November 2021 (per Bloomberg).

The bond bull market is over, and this is where you need to think differently. First and foremost is the lost ability to sell at worthwhile prices. Those private equity investments that performed so well in 2021, well, let’s just say they’re giving it all back in 2022 as the S&P Listed Private Equity Index recently printed below 150.

What about those other inflation fighting alternative investments? Real estate investments do not work as well with higher interest rates. Good thing you locked your rate in…except that will not help the investors you would like to sell to. In a bond bear market liquidity tends to go poof, sometimes overnight.

Bitcoin, gold, and even oil has seen their gains of last year reverse almost entirely. If you are beginning to think there is no place to hide you would be thinking in the right direction.


Sideways Over…What Is Next?

August 26th, 2022 by Kurt L. Smith

The sideways moves in financial markets these past few months has provided a respite from the unprecedented moves experienced in the first half of this year. A sideways move, also known as a correction, can confound market participants particularly traders and speculators who are generally trend followers.

Bond watchers should know the trend by now as bellwether interest rates on the ten-year U.S. Treasury note climbed from a low of 0.31% on March 9th, 2020 (prices/yields per Bloomberg) to 3.50% on June 14th, 2022. Those yields equate to a price of 111-19 in 2020 on the ten-year 1.50% U.S. treasury note due February 15, 2030, and 86-14 in June, for a loss of over 25 points.

The summer sideways action saw bond prices rally with the bellwether treasury note trading at 93-03 on August 2nd or 2.50% for a nice, quick one hundred basis point correction over about six weeks for a six-plus point gain…but now sideways is over. This week the yield on the ten-year note is now back over 3% (3.11% as of August 25th).

The trading action of the bellwether ten-year note is instructive because this is how corrections work. Yes, the 3.50% level in June was a new high for the cycle but it also a new high dating back 11 years! The ensuing correction was swift (so far, a matter of weeks), but it does not change the trend.

The current question for bonds is whether the correction (sideways action) continues for a few more months or whether bonds hit new higher interest rates (new lower prices) in the coming weeks.



August 1st, 2022 by Kurt L. Smith

Markets, even in the unprecedented moves of this year, do not move in straight lines. A trending market will move, move, move and then, suddenly, seemingly, will move in the opposite direction.

This is how markets move and lately it has been sideways. For bonds, we might watch the US treasury ten year note yield. On June 14th the yield hit a new high yield of 3.50% (all yields/prices per Bloomberg) which also means it was a new low for price. It was a new high for yield (low for price) that had not been seen since 2011. The opposite, seemingly, of the low yield (0.31%) and high price extreme of March 2020, the end of the bond bull market. And yet, over the following days, yields suddenly reversed course, plunging to 2.74% on July 6th. It has been sideways since.

I bring this up because stocks, suffering an unprecedented decline this year, hit their low on June 17th with the S&P 500 Index hitting 3637, a steady decline from the 4818 high of January 4, 2022, for down 24%. The decline has ended, seemingly, and since June 17th stocks bounced. It has been sideways since.

In a downward trending market, the type of market bonds and stocks now find themselves, corrections are upward moves in price. Lately we are not marking new price lows in these markets; we are moving sideways. This period is a correction of the new downward trends for bonds and stocks.

Corrections can confound traders. Suddenly, their trades are not working for them, but instead the trades are working against them. It is a gut check: continue with the trade in the hopes the correction is temporary or reverse their trade and risk a whipsaw effect.


Evaporating Asset Prices Continued

August 1st, 2022 by Kurt L. Smith

Asset prices continue to evaporate. The cryptocurrency assets, led by Bitcoin, have lost over $2 trillion since its peak in November according to Coin Gecko back on June 12th. The Big Tech names of FAANG stocks (Meta, Apple, Amazon, Netflix, and Alphabet) along with Microsoft have collective losses of $3.3 trillion this year per S&Ps June 13th report. For context, the entire municipal bond market totals only $4 trillion (Bloomberg).

Whether stocks, bonds (Bloomberg’s U.S. Treasury index is down over 10% year to date, June 24th) or crypto your portfolio is hurting. Inflation, by any measure, is taking a toll on your wallet. There seems to be nowhere to hide.

Listening to the experts, the ones who manage trillions and spend billions on advertising, and you will hear the familiar refrain, just hang in there. This is great advice for them as they continue to collect billions of dollars in fees managing your money.

This is your money. If you want to keep it, you might need to do something about that. We have seen asset prices evaporate. Will that continue? And what if it does? With inflation surging, what are the alternatives?


Evaporating Asset Prices

August 1st, 2022 by Kurt L. Smith

Another down week on Wall Street but who is counting? Obviously, everyone because we know that number to now be six, as in six weeks. But I digress as I am a bond guy so let me keep on task. Another down week for bonds, all told close to 110 now since the top in bond prices, but who is counting… besides me?

This week we set new lows in price for the bellwether ten-year and thirty-year U.S. Treasury note and bond. Now those unprecedented year to date bond returns we saw last month are even more unprecedented. The worst ever start for US treasuries is beginning to be felt in other markets.

Thus far market prices have simply evaporated. Some call this orderly; others call it a reset. Stock prices for companies that were formerly considered home runs (think Peloton, PTON) have now retraced all their home run up. From a $18 low in March 2020 to $171 in January 2021 and below $12 last week (per Bloomberg), PTON does not stand alone with this chart. You can find other stocks and ETFs have similar looking charts. There is a lesson here: only sell the stocks you want to record a gain because later you might not have one.

But back to bonds. Unlike stocks, where values are created or destroyed based on the share price of the last share traded, bond prices can evaporate without any such trading. Think about that. And think about it some more because, in my opinion, it is bond pricing that is wreaking havoc with asset prices.


Merely Gaining Steam

April 28th, 2022 by Kurt L. Smith

Last month I discussed whether the bond bear market had finished its first leg down or was it merely gaining steam. Over the past few weeks, we got an answer to that question.

I also discussed the importance of stocks moving to new highs or there is a risk for a larger correction. What is a larger correction? I believe we can place Netflix (NFLX – NASDAQ) as the new poster child for the definition of larger correction. At its recent price of $193.50 on April 27, 2022 (all prices and yields per Bloomberg), Netflix is down 72% from its all-time high of $700 set just five months earlier on November 11, 2021. Again, merely gaining steam.

The “What, me worry?” crowd continues to fiddle while Rome burns. The losses in bellwether US treasury notes and bonds over the past several months is unprecedented. The losses in the NASDAQ for April 2022 may be among the worst months ever. 3% mortgages are now 5% mortgages and inflation is, pick a number, 8%?

My get-out-of-bonds mantra for the past two years has now morphed into get-out-of stocks. Normalcy was exceeded months ago and is now moving toward extreme, yet capitulation evades us. Instead, we are looking at wave after wave of continued downward prices for financial assets.


Worst Quarter Since 1973

March 30th, 2022 by Kurt L. Smith

Bloomberg published this line on March 22nd as their US Treasury Index had lost 5.55% since year end, surpassing the 5.45% loss at the beginning of 1980, the biggest quarterly decline since their index was created. In the middle of the bond bear market’s first move, this type of poor performance is to be expected.

Some people look at the bond market’s performance as the tortoise versus the stock market’s hare. Every day, bond investors look into the mirror (at bond performance) and it looks as if little has changed. Here, in the early stages of the bond bear market, nothing could be further from the truth.

The yields on the risk-free US treasury bellwethers we track have soared over the past two years. The 1.5% treasury note of February 15, 2030, sold at a .31% yield (111-19) on March 9, 2020 (all yields/prices per Bloomberg). This past week that note traded at 2.52% (92-23). This is an almost 19-point loss or 17% on the bellwether ten-year treasury note. Longer maturities fared far worse. Our bellwether is the 2.375% of November 15, 2049, and it sold at .70% or 140-17 on March 9, 2020. Last week this bond sold at 2.67% (94-09) for a 46-point loss or 33% of value.

Bond bear market? I do not recall reading that headline in the New York Times or splashed across magazine covers of late. But a dribble here and a dribble there while looking in the mirror has eroded significant values in the risk-free-rate US treasury market.

Almost all this price erosion happened before the Federal Reserve hiked interest rates. That did not happen until March 16th. So much for fed leadership; how’s that for Fed response?


Now It Gets Interesting

February 17th, 2022 by Kurt L. Smith

Long-term investors, I mean old investors, have experienced market reversals. As night becomes day, market selloffs lead to new, higher prices. This law of nature does not apply to markets, though one’s experience tells one otherwise.

Over the last 40 years we have seen downdrafts leading to new highs. You remember the dates: 1987, 2000, 2007, and lately, 2020. What you may not be aware of is the same dates also saw similar action in bonds. The long-term bull market for stocks was mirrored by bonds. Bond and stock performance marched ever upward, together…until they did not.

I have worked hard to let you know the bull market in bonds is over. Yields traded at such a next-to-nothing interest rate in March 2020 resulting in record high bond prices. Compared to the double-digit yields of the early 1980s, which equated to record low bond prices, I believe the bond market has completed its long bull market journey. The bond bull market is over, and you should not own bond mutual funds.



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