Fixin’ To

In late August we finally received the word from the mount on high. From his temporary perch at Jackson Hole, Federal Reserve Chairman Jerome Powell delivered his “time has come” speech. Treasury bills, the leader in all things short term, had obviously received advanced word as short-term interest rates broke to yearly lows.

Last month we noted treasury bills had fulfilled the requirements for a correction. We have long noted the key problem with corrections (like the problem with market tops) is it is tough to know how low low is (or how high high is). August brought us the strongest drop for yields in over a year as both three- and six-month bills hit new yearly lows. Chair Powell obviously noticed.

We are not treasury bill traders. Whether you are receiving a 2% taxable return on your cash in 2019 or 0% for the two years following the March 2020 beginning of the bond bear market, is not my primary concern. You would not have been happy then or even now when you are earning more. Selecting worthwhile municipal bonds is the key to your bond portfolio performance.

The market, both stocks and bonds, has been waiting for this “time has come” ever since treasury bills began their trek from below 0% in 2020 to around 5.5% in October 2023 (all prices and yields per Bloomberg). How high would interest rates rise? With inflation hitting 9.1% in June 2022, we all became concerned.

The inflation print of over 9% was a key moment. Beginning July 2022, investors pushed the yield on ten-year treasury notes below that of the two-year treasury note yield, a situation called yield inversion. In a matter of weeks, the price of the ten-year note rallied sending yields from 3.5% to almost 2.5%, eventually pushing the ten-year note yield more than 1% lower than the two-year note.

Bond market participants have implored customers to move into longer (maturities) duration ever since and the drumbeat is strong as ever today. They need to beat the drum louder! The buyers of the ten-year treasury notes in 2022 are still underwater even as the ten-year note recently rallied from 5% to 3.66% in early August.

Adding duration in treasury notes and bonds has worked best for market makers, not investors. Just when you think interest rates will continue their current trajectory, they turn the other way. We are not traders, we are investors.

The most important thing to know when investing is trend. Interest rates bottomed out in March 2020, at, below, or near zero percent. This means prices for bonds, almost all bonds, were at their extreme high in price. We are not going back…but we have and will have corrections in which bond prices rally and yields fall.

The rally in the ten-year treasury note back in 2022 was a correction; months later prices sank in the yield on the note continued to its eventual peak of 5%. Hence another correction, now about eleven months long.

Tired of hearing about corrections? You should not be. Trend is the name of the game and when the correction ends, the next move for longer-term interest rates will be higher. Last month I noted that change appears at hand. We are seeing it with increased volatility in both stocks and bonds (per the VIX and MOVE indices respectively). These are the warning signs we need to heed. Trends do not last forever; neither do corrections.

Just to be clear, the Federal Reserve will probably cut their interest rate target to follow the path of treasury bills. They did so in 2007 and again in 2019. Yet that did not prevent both stock and bond prices from trading much cheaper afterward even though treasury bill yields were cut and were lower. The swoon in stock and bond prices happened even though the trend for stocks and bonds was toward higher prices. Now that the trend for bond prices is lower, perhaps the danger is even more pronounced.

Elysian Fields Independent School District, TX

Unlimited Tax School Building Bonds, Series 2024

A+ S&P Under (AAA on PSF)

Due 2/15   Dated 8/1/24 Maturity 2/1/49

$51,895,000 Sold

Years   Maturity       Coupon        Yield*

1         2025             5.00%           2.78%

2         2026             5.00%           2.71%

3         2027             5.00%           2.69%

4         2028             5.00%           2.69%

5         2029             5.00%           2.72%

6         2030             5.00%           2.77%

7         2031             5.00%           2.87%

8         2032             5.00%          3.00%

9         2033             5.00%          3.02%

10       2034             5.00%          3.08%

11       2035**          5.00%          3.18%

12       2036**          5.00%          3.23%

13       2037**          5.00%          3.28%

14       2038**          5.00%          3.34%

15       2039**          5.00%          3.42%

16       2040**          5.00%          3.50%

17       2041**          5.00%          3.59%

18       2042**          5.00%          3.65%

19      2043**           5.00%          3.71%

20      2044**           5.00%          3.76%

25      2049**           4.00%          4.21%

*Yield to Worst (Call or Maturity) **Callable 2/15/34

Source: Bloomberg

This is an example of a new issue priced the week of 8/26/24

Prices, yields and availability subject to change