Is This It?

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.

Since late last year the longer treasury swooned to 47 in April before hitting a high just over 56 this past week. Sell on the news! This bond traded at essentially the same price in late September 2022, which does not mean much income when you own a 1.25% bond.

Long term municipals look similar as Bloomberg’s thirty-year municipal scale hit 4.59% on October 30^th, 2023, and ran down to 3.34% on December 28^th, 2023, in the in the sprint retracement. Since then, the longer-term municipal bonds have failed to rally further, finishing last week at 3.48% nine months later. Like treasuries, this yield approximates September 2023 as well, but your return would be better than a 1.25% coupon.

I wrote last month about how participants in the rally in the ten-year note in late 2022 have remained underwater ever since. Even with the most recent eleven month “rally,” this remains the case. The bond bear market is at work, despite the cheerleading of the financial industry whose future depends on that not being the case.

Treasury bill yields peaked at 5.50% in July 2023 and on July 26^th of that year the Federal Reserve last raised its target rate from 5.25% to 5.50% to keep pace. A year later treasury bill yields began to slide lower with three-month treasury bills sliding from 5.3% on July 26^th, 2024, to 4.65% today while the six month treasury slid from 5.15% to 4.46% today. With treasury bills at 4.65% and 4.46%, the Federal Reserve’s move from 5.50% to 5.00% appears late as well as short.

With $234 billion in treasury bills, Warren Buffett’s Berkshire Hathaway would appear to be a loser according to Bloomberg. But in the context of 0% to 5.50% such a reduction hardly amounts to much of a correction. Back in the 1990s Buffett would buy five year and under municipal bonds with his cash hoard. I am glad he has moved to treasury bills, leaving us the opportunity to continue to find worthwhile fish in the municipal bond pool.

Mr. Buffett realized that municipal bonds do not scale. This is a lesson lost on almost the entire municipal bond industry. From regulation to trading and portfolio management, municipal bond participants try to force square municipal bonds into a round peg hole. There is no “market” for municipal bonds; there is a distribution scheme. In a bond bull market such characteristics are hidden; in a bear market the lack of scale in municipal bonds will be devastating to those who ignore the lack of scalability.

Trying to make money in a bond bear market is difficult. Corrections can be quick as well as lacking follow through. Selection is the key. The Federal Reserve is not leading us; the Federal Reserve is following, albeit slowly, in this latest bond bear market correction. As we saw in the correction rally of 2022 and again in a in a few weeks in late 2023, such corrections are not providing investors in longer-term bonds much positive return. You have an alternative with The Select Approach^TM.

Chapel Hill Independent School District, TX

Unlimited Tax School Building Bonds, Series 2024

A+ S&P Under (AAA on PSF)

Due 2/15   Dated 10/1/24 Maturity 2/15/53

$18,110,000 Sold

Years   Maturity       Coupon        Yield*

1         2025             5.00%           2.79%

2         2026             5.00%           2.58%

3         2027             5.00%           2.58%

4         2028             5.00%           2.61%

5         2029             5.00%           2.63%

6         2030             5.00%           2.72%

7         2031             5.00%           2.82%

8         2032             5.00%          2.91%

9         2033             5.00%          2.96%

10       2034             5.00%          2.99%

11       2035**          5.00%          3.10%

12       2036**          5.00%          3.12%

13       2037**          5.00%          3.16%

14       2038**          5.00%          3.22%

15       2039**          5.00%          3.30%

16       2040**          5.00%          3.38%

17       2041**          5.00%          3.47%

18       2042**          5.00%          3.53%

19      2043**           5.00%          3.59%

20      2044**           5.00%          3.64%

25      2049**           4.00%          4.10%

29      2053**           4.00%          4.12%

*Yield to Worst (Call or Maturity) **Callable 8/15/34

Source: Bloomberg

This is an example of a new issue priced the week of 9/16/24

Prices, yields and availability subject to change