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Municipal Market Newsletter Archive

The Right Bond

January 31st, 2024 by Kurt L. Smith

We began 2024 with municipal bonds having rallied, not just in price, but also relative to U.S. Treasury yields. Ten-year generic AAA municipal yields were 3.62% on October 23rd and 2.35% on December 23rd (all prices and yields per Bloomberg). Compared to treasury yields, the 2.35% on municipals was 62% of the 3.78% on treasuries.

Municipal bonds are spread product. Investors like us buy them because the bonds offer a spread (better yield) to the so-called risk free U.S. Treasury bonds of a similar maturity. At 62%, municipal bonds offer some of the smallest spreads in decades yet investors continue to buy. Bloomberg’s Joe Mysak noted this last week, saying “if munis revert to their long-term valuations, or around 85% of treasuries, they should yield more than 3.50% right now…there’s still a long way to go.” Yields have bumped up slightly. Look at this month’s new issue highlight: the Wiley Independent School District in Abilene, TX bonds below. But as Mysak says, they still have a ways to go.

Yields on municipals continue to be much higher than those we saw in 2020, 2021 or 2022, though on a relative basis they are quite expensive. Tens of billions of dollars of new issue long-term municipal bonds were priced in January. They do not need our help getting them sold. Municipalities never need our help, whether interest rates are low and going lower or high and going higher.

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Manic Market?

January 3rd, 2024 by Kurt L. Smith

I have been tempted through the years to write my letter as “just like last month.” It certainly could apply this month. Treasury bond prices, as well as stock prices, are on a tear. Municipal and corporate bonds are right there with them. Everyone, it seems, has moved to one side of the boat.

This is the time of year for the pundits. Review 2023, predict 2024, we were right, they were wrong…it is an annual event. It is also a time to revisit perspective.

Over the past six months, longer-term interest rates, such as the ten-year US treasury note, rose from 3.85% on July 3rd to 5.02% on October 23rd and now back to 3.85% today, December 29th (all prices and yields per Bloomberg). For a price perspective, the newest ten-year US treasury note for the period, the 3.375% of May 15th, 2033, sold at 96, 88 and now back to 96 over the same six-month timeframe. These are nice juicy moves for traders, but who is a trader?

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It Was The Best Of Times

November 27th, 2023 by Kurt L. Smith

The holidays are upon us with the words of Charles Dickens usually coming from a stage near you, though these words are not from his A Christmas Carol. The opening line from A Tale Of Two Cities could also describe bond buyers here in the opening weeks of November.

The month began with ten-year U.S. Treasury note yields near 5% at 4.93%, just below a sixteen year high of 5.02% on October 23rd (all yields and prices per Bloomberg). For owners of long duration bonds, it has certainly been the worst of times of late. For those ready to take the plunge and buy at these high yields and low prices, it may be the best of times.

A mere three weeks later and yields have plunged, or at least dropped a bunch, to below 4.40% on November 17th. Hurry, before you miss out! But as a point of reference, 4.40% is also a sixteen year high for the treasury’s ten-year note, save the last three months.

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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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NEWS FEED

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