Change Appears At Hand

In April my letter examined whether the Federal Reserve would begin cutting rates. Optimism abounded as the ten-year treasury note yield fell from 5% to 3.88% (prices rose) in the fourth quarter of 2023 (all prices and yields per Bloomberg). By April such optimism had taken a hit as higher yields (lower prices) left the bond market correction hanging on by a thread.

Since October of last year, the treasury market has been in a correction. From near 0% (0.31%) in March 2020 to 5% on ten-year treasury notes, the market was due, if not overdue, for a correction. Short term treasury bills had seen a similar run from negative yields on the six-month treasury bill in March 2020 to 5.59% in August of last year, with most of the move happening in the preceding twenty months.

The bond market correction has not only hung in, but treasury bills (three months and six months) hit their lowest yield (highest price) in the correction last week, completing an A-B-C correction. Three-month bills moved from 5.51% on October 6^th to 5.28% this week, while six-month bills went from 5.59% to 5.12%. A ten month correction of a twenty month move? One can make an argument that short term treasury bills next move from here is toward higher interest rates not lower.

How about the optimism in the treasury market? Unlike the treasury bills, longer term treasuries are quite a way from their correction lows in yields set around year-end. The ten-year note trades currently around 4.17% versus 3.78% low and the thirty-year trades at 4.43% versus a low of 3.94%. None of this means the ten month correction in treasury securities is absolutely over but the warning signs are here.

Later this week the Federal Reserve will decide whether to change interest rates. Treasury bills set the pace for rate cuts and while I doubt a move Thursday, the timing of such a move to cut rates now might look more like a misstep if it were to happen.

Corrections are the market’s way of regrouping to extend the current trend. For bonds, the trend is towards higher interest rates. While treasury bill rates may continue their recent downward move for a while longer, it appears to me they have nearly finished their correction and short term rates should move to new highs greater than 5.5%.

The nice thing is, whether I am right or wrong with my above analysis, the effect on your portfolio should not be large. Your portfolio has been selected with the overriding trend in place. Unlike almost all other bond investors, “normal interest rates” are not needed for your bond portfolio to get back on track. Your portfolio is, and remains, on track.

Fighting the bond market trend is tough. The major players in bonds: funds, insurance companies, banks and even the Federal Reserve need all the help they can get to move interest rates low and keep bond prices high. In 2020 these same players either failed to see the trend change in bonds, failed to act, or both. Therefore, it would not be surprising to me to see the treasury market move further away from whatever one believes is “normal” and reach new higher yields and lower bond prices.

Like stocks, bond market volatility has hit multi-year lows. That, of course, is looking backwards. Volatility can change quickly. Here stocks are leading as volatility in stocks jumped during July. If bonds follow and volatility rises, we may begin (again) to see it shake out more worthwhile bonds for us. This is how The Select Approach^TM works. It works for you. I will be in touch.

Elgin Independent School District, TX

Unlimited Tax School Building Bonds, Series 2024

Aa3 Moody’s Under AA- S&P Under (Aaa & AAA on PSF)

Due 8/1   Dated 8/1/24 Maturity 8/1/54

$142,515,000 Sold

Years   Maturity       Coupon        Yield*

2         2026             5.00%           2.96%

4         2028             5.00%           2.96%

5         2029             5.00%           2.92%

6         2030             5.00%           2.97%

7         2031             5.00%           3.00%

8         2032             5.00%          3.04%

9         2033             5.00%          3.06%

10       2034             5.00%          3.07%

11       2035**          5.00%          3.11%

12       2036**          5.00%          3.14%

13       2037**          5.00%          3.20%

14       2038**          5.00%          3.24%

15       2039**          5.00%          3.31%

16       2040**          5.00%          3.41%

17       2041**          5.00%          3.50%

18       2042**          5.00%          3.57%

19      2043**           5.00%          3.64%

20      2044**           5.00%          3.68%

25      2049**           4.00%          4.27%

30      2054**           5.00%          4.06%

*Yield to Worst (Call or Maturity) **Callable 8/1/34

Source: Bloomberg

This is an example of a new issue priced the week of 7/22/24

Prices, yields and availability subject to change