Sideways Breaking Down

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 26^th (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 8^th, just as the so far, short-lived, banking crisis erupted, liquidity rushed in and days later the bill traded at 3.83% on March 16^th. 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 8^th. 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.

Nowhere is the optimism greater than it is with stocks. Here, sideways continues, nine months since the September/October lows. The S&P 500 did break out of its multi-month rut at the end of the first half of 2023 with a new correction high. The Dow Jones Industrials so far has not and continues in a six-month-plus rut.

As discussed for months, sideways is a correction. Whatever asset you want to look at: the NASDAQ, S&P 500, Dow Jones Industrials, Russell 2000, Bitcoin, corporate bonds, municipal bonds… all are in corrections. It is the US treasury market where we see cracks in optimism as the reality of higher rates continues to churn. The correction is over in short term treasuries and close to being over in longer term treasuries.

In a bull market one buys on the dips because corrections are buying opportunities. In a bear market, it is the opposite: one sells the correction because the larger trend is down. It is the three-year bear market in bonds, led by U.S. Treasuries, that has me concerned. Stocks and other assets have, for decades, been highly correlated with bond market performance.

The only way out of a sideways market is to mark new territory. Only short treasuries have done that so far. Stocks are currently within ten percent of their all-time highs and quite away from their lows of last fall. Optimism is sky high. Will the bear market reassert itself or is it stocks forever?

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Due 2/1   Dated 7/1/23 Maturity 2/1/49

$95,480,000 Sold

Years   Maturity           Coupon      Yield*

1         2024             5.00%           3.18%

2         2025             5.00%           3.12%

3         2026             5.00%           2.97%

4         2027             5.00%           2.85%

5         2028             5.00%           2.82%

6         2029             5.00%           2.90%

7         2030             5.00%           2.85%

8         2031             5.00%           2.87%

9         2032             5.00%           2.88%

10         2033           5.00%           2.94%

11          2034**       5.00%           2.99%

12          2035**        5.00%           3.09%

13          2036**        5.00%           3.18%

14          2037**        5.00%           3.33%

15          2038**        5.00%           3.42%

16          2039**       5.00%           3.46%

17          2040**       5.00%           3.50%

18          2041**       4.00%           4.00%

19          2042**       4.00%           4.05%

20          2043**       4.00%           4.08%

23          2046**       4.00%           4.20%

26          2049**       4.00%           4.26%

*Yield to Worst (Call or Maturity) ** Call 2/1/33

Source: Bloomberg

This is an example of a new issue priced the week of 6/26/23

Prices, yields and availability subject to change