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Interest rates have moved back down but this is not indicative of where interest rates “should be”, but rather a prelude to the next move which is to new interest rate highs (and price lows).

Correction Over!

July 28th, 2021 by Kurt L. Smith
  • Now that I have your attention, I hope I do not lose it by saying I am talking about long-term treasury prices. The March 2021 letter, Should We Be Traders? noted how the thirty-year bellwether treasury bond had lost all of its forty-point gain from the March 9, 2020, bond market top. The bond market moved from bull to bear, and I expect this bear to be a long one.

    The bellwether bond we watch is the 2.375% of 11/15/49, trading at 141 on March 9, 2020 (all prices per Bloomberg, rounded for simplicity). The low since then was March 18, 2021, when it traded at 98. Over the past four months prices have bounced upward, trading at 113 last week on July 20th. This upward bounce in price is the correction that is now over.

    When prices fall about 43 points over twelve months the expectation is for a bounce to occur, here about 15 points, over a shorter period. This price action also can be seen in yields, in the opposite direction, with yields rising from 1.00% in 2020 to 2.44% in March 2021 and back down to 1.82% last week.

    Similar price/yield action has occurred in the ten-year treasury yield. The 1.50% of 2/15/30 traded at .31% on March 9, 2020, and 1.67% on March 31, 2021 and 1.04% last week on July 20th. Low to high then a bounce; this is the correction!

    What does this mean? The idea of lower for longer (i.e., low interest rates) was shattered with a forty-plus point move and reversal. Interest rates have moved back down but this is not indicative of where interest rates “should be”, but rather a prelude to the next move which is to new interest rate highs (and price lows).

    Watch the ten-year US Treasury note yield climb from last week’s 1.13% low. We believe long-term bond prices should fall from here. These indicators should provide a better gauge for you than wondering how high is high or how much higher can stock go?

    We continue to find worthwhile bonds in the marketplace as we have for many years. Yes, I would love to have more bonds for you, but I am glad we have “some” versus “none”. Is this a function of what the bond market is doing? I wish I knew. We can only negotiate one day at a time here.

    The update on the bond market is important because almost everyone else approaches the bond market differently from the way we do here at The Select ApproachTM. Your bonds perform the way they do because they have been selected.  Other investors do not have the benefit of this selection therefore they approach the market differently. As an example, past performance probably plays a large role in whether investors continue to own bonds.  When other bonds begin to follow the trend of US treasuries the fallout may be substantial.  Bonds make up large percentages of many portfolios and even a small shift, when it occurs, may result in large price swings.

    If everyone’s bond portfolio performed like the bellwether thirty-year treasury bond over the past year, I would be surprised if investors would continue to embrace and hold them. But so far, the performance of the bellwether has been the exception in in the bond market. Therefore, the trend is so important. We are in year two of a bear bond market after about forty years of a bull. And just like year two of the bond bull in the early eighties, I believe the early adopters will benefit from this knowledge.

    Harris County Flood Control District, TX

    Improvement Refunding Bonds, Series 2021A

    Aaa Moody’s Underlying   AAA Fitch Underlying

    Due 10/1   Dated 8/5/21 Maturity 10/1/46

    $256,455,000 Sold

    Years   Maturity            Coupon      Yield*

    1          2022           5.00%           0.07%

    2            2023          5.00%           0.14%

    3          2024        5.00%           0.22%

    4           2025        1.00%           0.33%

    4          2025           5.00%           0.33%

    5          2026            5.00%           0.45%

    6            2027           5.00%           0.60%

    7            2028           5.00%           0.72%

    8            2029           5.00%           0.82%

    9          2030        5.00%           0.92%

    10        2031**      5.00%           1.01%

    11        2032**      4.00%           1.12%

    12        2033**      4.00%           1.18%

    13          2034**      4.00%           1.23%

    14           2035**      4.00%           1.25%

    15          2036**      4.00%           1.28%

    16          2037**      4.00%           1.31%

    17          2038**      4.00%           1.34%

    18        2039**      4.00%           1.36%

    20          2041**      3.00%           1.67%

    26         2046**      4.00%           1.57%

    26          2046**      5.00%           1.47%

    *Yield to Worst (Call or Maturity) ** Call 10/1/30

    Source: Bloomberg

    This is an example of a new issue priced the week of 7/19/21

    Prices, yields and availability subject to change

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