For more than five years I have written the trend for long-term bond prices is down. Bonds have been in a bear market since the 2020 top in prices (low in yields). Our bellwether bond, the 1.25% of May 15, 2050, topped in price on August 6, 2020, just over 102 and on October 20, 2023, it hit its low of 43.25 (all prices and yields per Bloomberg).
How anyone could argue a case for owning long-term bonds is a mystery. We expected a correction of this steep decline, and the correction concluded at 56.185 on September 17, 2024, the day before the Federal Reserve first cut short term interest rates fifty basis points.
Since the Federal Reserve’s rate cut, long-term bond interest rates have soared and prices plunged, first to 46 on January 10, 2025, before correcting back up to 53 on April 3rd. This is when the US bond futures contract lost ten points in three days. Warning! Our bellwether fell back to 46 as a result but only able to recover to 49.
This past week the bellwether traded fractionally above 45 as it neared the 2023 low which I believe will eventually be taken out. At these prices the yield on this and other longest-term treasury bond is north of 5%. Will the yield hit 5.50%, 6%, or even 7%? Hard to say, but I can continue to say, and write, the trend for long-term bond prices remains down.
Cash is king. While investors may own a tremendous amount of cash, municipal bond investors almost exclusively own the market for municipal bonds. That is, municipal bond investors own long-term bonds which have performed poorly for them (close to break-even) over the past one-, three-, and five-year periods. The Bloomberg Municipal Bond Index has performed accordingly. Comparing performance to your municipal bond mutual fund of choice, or your favorite exchange traded fund ETF, and you will see similar poor results. When you compare it to your Select ApproachTM portfolio on your statement you will see a different, better reality. You do not own the market; your bonds are different.
Turning to short term yields, the Federal Reserve cut rates again on November 7th, 2024, and lastly on December 18th, 2024, for a total of 100 basis points. The six-month treasury bill was approximately 5.40% in June 2024, near its high. On December 18th the bill was about 4.30%, so the 100 basis points of Federal Reserve interest rate cuts were following the treasury bill yield. Last month, on April 7th, the treasury bill traded below 4% which might have indicated another 25-basis point cut, but last week the yield was 4.30%, the same level as December’s treasury bill interest rate.
At current treasury bill interest rates, there is little reason (or hope) for the Federal Reserve to cut interest rates. Six-month treasury bills ran from near 0% in 2020 to their 5.4% high in June of 2024. Was the move down below 4% merely a correction? If so, treasury bills could also climb to new highs in yield.
Certainly, treasury bill yields hold sway over the returns of cash in one’s portfolio. We do not control these rates, but what we can control is not owning the market of municipal bonds and the poor performance such ownership has delivered these past umpteen years.
Focus on what you can control. My approach, The Select ApproachTM, has performed for years. The warnings in the bond market are over as it appears to me the next leg of the bond bear market is currently unfolding. Will this be the leg that finally gets bond investors attention? Or even worse, will this be the leg that gets the stock market’s attention?
Fort Bend County, Texas
Senior Lien Toll Road Revenue Refunding, Series 2025
A2 Moody Underlying A+ Underlying Fitch AA S&P AGM
Due 3/1 Dated 6/15/25 Maturity 3/1/55
$261,345,000 Sold
Years Maturity Coupon Yield*
1 2026 5.00% 3.07%
2 2027 5.00% 3.09%
3 2028 5.00% 3.09%
4 2029 5.00% 3.16%
5 2030 5.00% 3.20%
6 2031 5.00% 3.27%
7 2032 5.00% 3.35%
8 2033 5.00% 3.43%
9 2034 5.00% 3.55%
10 2035 5.00% 3.65%
11 2036** 5.00% 3.79%
12 2037** 5.00% 3.92%
13 2038** 5.00% 4.01%
14 2039** 5.00% 4.11%
15 2040** 5.00% 4.22%
16 2041** 5.00% 4.35%
17 2042** 5.00% 4.46%
18 2043** 5.00% 4.55%
19 2044** 5.00% 4.63%
20 2045** 5.00% 4.69%
21 2046** 5.00% 4.76%
22 2047** 5.00% 4.82%
25 2050** 5.25% 4.86%
30 2055** 5.25% 4.94%
*Yield to Worst (Call or Maturity) **Callable 3/1/35
Source: Bloomberg
This is an example of a new issue priced the week of 5/19/25
Prices, yields and availability subject to change