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A turn from the top doesn’t get much attention (it’s a buying opportunity, right?), but at some point the market’s mood shifts so dramatically and with it the idea that prices may not recover.

Considerable Time Over

January 8th, 2015 by Kurt L. Smith
  • Long-time readers know we have been waiting for expected change in the bond markets for a…considerable time.  After all, we are in year three of a bond bear market, yet all we seem to hear from bond market participants are interest rates should remain low for a considerable time…until they no longer do.

    The Federal Reserve removed the words “considerable time” from their December 17th press release.  While I do not view this as news, this is the bond market after all (there has been little to say).  Perhaps the Federal Reserve does watch the bond markets and their recent turn of phrase is their way of perhaps conveying the long bond bull market is indeed over.

    The Fed obviously knows benchmark U.S. interest rates, led by the ten year treasury note, bottomed on July 25th 2012 at 1.38%, per Bloomberg data.  While few recognized the significance of this turn, bond market weakness continued throughout 2013, hitting a rate of 3.05% on January 2nd, 2014.  Weakness in 2013 became strength in 2014, culminating on October 15th when the ten year note yield hit 1.86% and quickly (some say violently) reversed.  As 2014 winds down the ten year is now around 2.25%, the same yield as six years ago and a considerable time in most anyone’s estimation, especially when markets are concerned.

    Not only are we at the end of something (a nearly thirty year bull market for bonds), nor are we merely at the beginning of something (a tremendous bear market for bonds), but the turning point was two-plus years ago.  I didn’t expect the Fed to send a press release marking the 2012 turn but I do expect the Fed to recognize that ten year interest rates are (trending) higher (since the July 25, 2012 low).

    The Fed’s credibility is at stake.  Having pushed interest rates down as far and as hard as they could in an attempt to reflate prices, the Fed is left with one reflated asset class, stocks, while other prices are either weaker (bonds) or have plunged (commodities, especially Gold and Oil).  The Fed had also hoped their scheme would work with respect to inflation, but here again, inflation is failing to live up to the Fed’s (low) standards.

    If bond price weakness continues as it has since October 15th, the Fed is in danger of having the biggest asset class go in a direction contrary to their wishes.  The Fed has ignored the turn for two-plus years; perhaps this explains “considerable time” over.

    Investors in stocks do not seem to care as low interest rates are low interest rates and that is what 2.25% represents.  But a trend change is completely different.  Almost no one is talking about a trend change in bonds (thank you very much) but that is when trends change.  A turn from the top doesn’t get much attention (it’s a buying opportunity, right?), but at some point the market’s mood shifts so dramatically and with it the idea that prices may not recover.  Ask your friend in the oil business how fast that might happen.

    We have been preparing for the eventual aha moment in bonds…for a considerable time.  We have focused in shorter bonds and have been careful, credit-wise, with all of our bond investments.  As more and more investors begin to realize there is a downward trend in long-term bond prices, I believe we will see unprecedented market moves.

    Not only has the Fed used the term “considerable time” for a considerable time, interest rates on the benchmark ten year note have been in the 2.25% area for an even more considerable time.  Investors who may have assumed considerable time might somehow be longer, may be in for quite a shock if I am correct and bond prices continue to sink.

    I need not reiterate that never before have so many owned so many bonds at such high prices (and low yields). Never.  Based on my analysis and the two-plus years already in a bear market trend, we may not need wait much longer.


    Comal Independent School District, TX

    Moody’s Aaa (Aa2 Underlying) Fitch: AAA (AA Underlying)

    Permanent School Fund Guaranteed Due 2/1 Dated 1/1/15 Maturity: 2/1/2036

    Sale Amount: $79,745,000

    2 2017 2.00% 0.59%
    3 2018 5.00% 0.87%
    4 2019 5.00% 1.15%
    5 2020 2.00% 1.38%
    6 2021 2.00% 1.60%
    7 2022 2.00% 1.79%
    8 2023 2.50% 1.92%
    9 2024 4.00% 2.02%
    10 2025** 4.00% 2.19%
    11 2026** 4.00% 2.37%
    12 2027** 4.00% 2.53%
    13 2028** 4.00% 2.67%
    14 2029** 4.00% 2.78%
    15 2030** 4.00% 2.83%
    16 2031** 4.00% 2.90%
    17 2032** 4.00% 2.93%
    18 2033** 4.00% 2.97%
    19 2034** 4.00% 3.00%
    20 2035** 4.00% 3.05%
    21 2036** 4.00% 3.10%

    *Yield to Worst (Call or Maturity) **Par Call: 2/1/2023

    Source: Bloomberg

    This is an example of a new issue priced the week of 1/05/15

    Prices, yields and availability subject to change




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