Municipal Market Newsletter Archive

Bonds Make A Splash

June 3rd, 2025 by Kurt L. Smith

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 3^rd. 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 Approach^TM 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 7^th, 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 Approach^TM, 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

Tags: bellwether bonds, bond bear market, Federal Reserve, municipal bond market, treasury bill
Posted in Municipal Market Letter

Loaded With Optimism

April 29th, 2025 by Kurt L. Smith

Are investors concerned out there? Some may say so, but most are doing nothing. Stocks have sold off, but most indices have recovered, some, maybe half, of their losses. Lots of talk, fretting, ignoring, but seemingly little selling going on.

One might expect this in the stock markets. After all, the major stock indexes set record highs in the past several months and remain nicely higher than where they were a year or two (or many years) ago.

This is not the case for bonds. We are five-plus years removed from the bond bull market top in 2020, and investors have little, if anything, to show for their loyalty of sticking with their bond investment.

Performance matters were so I would think. Last month I wrote how losing four points on long term bonds makes positive performance very difficult. Then came April.

On April 4^th the Treasury Bond Future traded above 122; on April 9^th it traded below 112 (all yields and prices per Bloomberg). Ten points lower in three days. Volatility in bonds is nothing new in the ever-expanding bond bear market. Since setting a ten year low in 2020, the ICE Bank of America MOVE index has trended higher. Volatility is not your friend, and it has spread to the stock market as well.

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Tags: asset prices, bond bear market, long-term trends, municipal bond market, treasury bond
Posted in Municipal Market Letter

But Look At The Yield!

April 4th, 2025 by Kurt L. Smith

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.

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Tags: bond bear market, bond market trend, long-term trends, municipal bond market, treasury bond
Posted in Municipal Market Letter

Bears Out The Problem

March 9th, 2025 by Kurt L. Smith

Trend reversals take time with long term trends taking a long time to reverse. Throughout the multi-decade stock and bond bull markets we were used to trend reversals. By the time a downward trend was recognized, the odds were the correction was nearing its end and prices began to rise again. You might know this as buying the dips. It worked well for both stocks and bonds following the corrections of 2000, 2008 and 2020. But bonds failed to continue their bull ways while stocks went on to set new highs since then.

Bonds reversed trend in March 2020 almost five years to the day. We have entered a bond bear market, and you know it largely because I remind you every so often. Investors bought bonds on the dip in 2020, including you. Other investors invest in the bond market. Here at The Select Approach^TM, we rely on individual bonds to perform differently from the market.

Rather than selling one’s bonds in 2020 investors continued to buy because they were accustomed to buying dips. Even when the bond market failed to reach new highs in price, investors seemed pleased to buy cheaper bonds at yields much higher than in 2020. Buy more in a bear market? That is the power of Wall Street. That is the power of optimism. That is the power of not knowing the power of a bear market.

Of course, it may also be that investors do not really know how bonds work. Last month I discussed how individuals now own about seventy percent or $3 trillion of the $4.2 trillion municipal market. In a February 12^th Bloomberg article, author Martin Z. Braun looked at the returns (after fees) of open-end municipal bond mutual funds compared to customized portfolios known as Separately Managed Accounts (SMAs). Long national municipal open-ended mutual funds delivered 2.25%, -1.01%, 0.83% and 2.21% for one year, three-year, five-year and ten-year respectively. Looking at the performance of long national municipal separate managed accounts (SMAs), those clocked in with 0.58%, -1.35%, 0.47% and 2.13% for the same respective periods.

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Tags: bond bear market, bond market performance, bond market trend, higher interest rates, Municipal bond, reverse trend
Posted in Municipal Market Letter

Bears Out The Problem

March 5th, 2025 by Kurt L. Smith

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Tags: bond bear market, bond market performance, higher interest rates, municipal bond market, performance, trend change
Posted in Municipal Market Letter

Your Bonds Need Your Help

February 5th, 2025 by Kurt L. Smith

Everyone seems to have some bonds. There are tens of trillions of dollars in bonds out there. The Securities Industry and Financial Markets Association (SIFMA) puts the figure at $46 trillion in the United States and $119 trillion worldwide. Closer to home, municipal bonds now make up $4.2 trillion of the market, per the Federal Reserve, with individuals making up 70% of the market (about $3 trillion) according to Franklin Templeton.

As we discussed last month, investors in the bond markets own the market. Everyone’s portfolio looks like everyone else’s portfolio. When the municipal market started 2024 like a house on fire, everyone benefited. Year-to-date returns, per Bloomberg’s Municipal Bond Index, approached double digits through the first three quarters, only to lose almost all of it in the fourth quarter.

This is what happens when you are not investing with the trend. The trend for bonds is lower prices. I discussed for many months how trending markets will usually undergo a multi-month correction, and that is how I was describing 2024’s bond performance. Individuals piled into municipals, not realizing they were buying into a bond bear market and at the wrong time.

Investing in bonds the same way one has always invested in bonds is…, well you tell me. Look at your results over the past year, or three years, or five years. You are investing in a market in which the trend is down. And you are paying for the privilege, either a little, or a lot.

When it comes to bonds, it also does not matter what fund you own or who the manager is or what their past performance has been. You own bonds and in a bear market your performance is going to suffer. Since seemingly no one has determined that this is a bond bear market, I would say the greatest suffering is yet to come.

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Tags: bond bear market, bond market performance, Federal Reserve, municipal bond market, Sell Bonds, under-performing bond investments
Posted in Municipal Market Letter

Performance Matters

January 6th, 2025 by Kurt L. Smith

It is the new year and with optimism gripping the financial world ebullience is everywhere. Contagion? Evidently because everyone is excited for the new year, the new administration, new tax laws, less regulation…a veritable Shangri-La here at home.

Unfortunately, the bond market failed to get the message. Or perhaps it did; just think about how bad the bond market would be if there was not a contagion of optimism?

The scorecard for 2024 is now out and bonds were not the place to be. Not just compared to the one-two punch of stocks for the second straight year, but as a standalone asset class. Bonds should yield something, particularly when people are buying them left and right because, hey, they now yield something.

The results say otherwise. For the year, the Bloomberg US Treasury Index clocked in with a +0.58% gain for the year (all prices and yields per Bloomberg). If we add Corporate Bonds and Mortgages to the mix, the Bloomberg US Aggregate Bond Index finished up 1.25% for the year while the Bloomberg Municipal Bond Index, a highflyer almost year all year as we discussed in the October 28^th letter when up 9.81%, finished up a mere 1.05% for the year.

Longtime readers know this is not a new phenomenon. Performance figures in a bond bear market are difficult because the wind (the trend towards lower interest rates) is no longer at your back but instead buffet you in the face (as the trend is toward higher interest rates). It has been almost five years since the bond bear market began in March 2020. In now appears we are almost halfway through what is shaping up as a lost decade of bond market performance.

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Tags: bond bear market, bond market performance, bond market trend, Municipal bond, scalability, treasury bond
Posted in Municipal Market Letter

Come On In

December 6th, 2024 by Kurt L. Smith

One of the sales pitches for buying bonds (albeit an effective one) these past few years has been to buy bonds because now they earn you something. But while everyone knows 3% or 4% is greater than 1% or 2%, it is hardly a reason to do something silly.

The fact that interest rates were once near zero and now they are not should give you pause. Higher interest rates are not a recipe for bond investment performance. It was the trend toward lower interest rates over three decades that provided the wind in the bond bull market’s sails. With the new trend of higher interest rates, bond investors face headwinds that crimp performance.

Taking a longer-term perspective may help. The “higher” interest rates we now have are like where they were ten years ago. We buy a number of bonds issued ten or so years ago, so I am reminded daily. It also explains why the Bloomberg Municipal Bond Total Return Index for the past ten years is 2.73%. On December 2, 2014, the Index stood at 1064 and last week on November 29, 2024, it was 1355 (all prices and yields per Bloomberg). This Index covers the long-term tax-exempt bond market across four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds.

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Tags: bond bear market, bond market correction, Federal Reserve, higher interest rates, interest rate cuts, municipal bond market, treasury bill
Posted in Municipal Market Letter

Bonds Reverse on News

October 28th, 2024 by Kurt L. Smith

The Federal Reserve’s September 18^th rate cut was the news. This move followed excitement for the cut as three-month treasury bill yields moved from about 5.40% in July to 4.75% on the 18^th. Six-month treasury bills moved from 5.30% to about 4.50% in the same time frame (all yields and prices per Bloomberg). The Fed merely followed the markets, as expected.

While the short-term interest rates have largely held in since the cut, longer term bonds have tanked. Sell on the news indeed! Our bellwether poster child, the US treasury bond 1.25% of May 15, 2050, sold at just over 56 on September 17^th and below 50 today, October 25^th. This is essentially the same level the bond traded at on October 24^th, 2022.

It is difficult to make money in a bear market. The first step needed is to recognize that this is the trend. We reached this point years ago, back in 2020 when the bellwether sold at twice its current price, near par. Most investors have failed to recognize this first step. They have done what most investors have done: they held and/or doubled down. Unfortunately, with respect to bonds, they have not held bonds which have treated them well.

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Tags: bellwether bonds, bond bear market, Federal Reserve, interest rate cuts, municipal bond market, treasury bond
Posted in Municipal Market Letter

Is This It?

September 25th, 2024 by Kurt L. Smith

For about eleven months now, bonds have traded higher in price and lower in yield in the most recent correction of the nascent bond bear market. From near 0% interest rates in 2020 to over 5% in 2023 in longer US treasury notes (below 0% to 5.50% for treasury bills), corrections are natural movements in how trends are developed.

While bond prices have rallied, we have also seen stocks hitting new highs as well. Even the Federal Reserve jumped on the bandwagon cutting rates this week to fulfill the promise made last month.

Yet for so much time, for so much work, the rebound in bonds looks pathetic. Most, if not all, of the rally occurred in the final nine weeks of last year. Our favorite long treasury bond, the 1.25% of May 15, 2050, traded at 43.25 on October 20^th, 2023, and just over 55 on December 28^th, weeks later. That’s a nice 27% gain for prescient traders, but a far cry from the 102 on August 6^th, 2020 (all prices and yields per Bloomberg). This is what a bond bear market looks like.

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Tags: bond bear market, bond market correction, interest rate cuts, municipal bond market, scalability, treasury bill, treasury bond, Warren Buffett
Posted in Municipal Market Letter

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