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With the bond bear market established with the sell-off followed by a retracement pattern, the next leg should take us to higher yields and lower prices beyond what we saw last September/October.

Still Zig Zagging Away

June 3rd, 2023 by Kurt L. Smith
  • According to Bloomberg’s Nic Querolo, municipal bonds lost 1.38% for the month through late May, which would make it the worst May performance since 1986’s 1.63% loss. Querolo goes on to say May has been the strongest month for municipal performance over the past ten years at up .9% on average.

    While I place the beginning of the bond bear market in March 2020, municipal bonds did not peak until August 4, 2021, per Bloomberg, selling off into the first leg of the bear market October 26, 2022 with a 13.4% decline in the Bloomberg Municipal Bond Total Return Index.

    The correction since late September/early October has occurred for many, if not all, asset classes, municipals included. It was the correction’s peak in April that set up municipal bonds dreadful May.

    We are still in correction territory and unfortunately (for traders), that is a tough place to be. February was a dreadful month for municipals as well but the bond market’s response to the bank failures in early March sent prices to new correction highs (new yield lows). Will we see another move to new correction price highs or is a tough May the precursor of higher yields yet to come?

    With the bond bear market established with the sell-off followed by a retracement pattern, the next leg should take us to higher yields and lower prices beyond what we saw last September/October. One piece of evidence supporting this might be Bloomberg’s US General Obligation BBB New Ten-Year curve which set a new bear market high at 4.56% on May 26th. With figures more in step with my bear market dates: a low of 1.43% on March 9, 2020, to an October 26, 2022 high of 4.31%, and back to a correction low of 3.02% on April 12th before blowing out to 4.57% on May 31st. Evidently this huge move, occurring mostly over the month of May, contributed to the dismal performance for the month noted above.

    When ten-year bond yields triple, one would expect to see fallout. Bond prices matter. Whether they matter enough for investors to beget more selling, is, and will be, in my opinion, one of the greatest mysteries of this nascent bear market. It does not take a crowd of sellers to crater bond prices, in fact I do not know what it takes, but eventually there will be fallout.

    The municipal bond sell off has not yet pushed higher grade yields to new bear market highs (or lows in price). Bloomberg’s AA equivalent yield index peaked at 3.13% last week, compared to October’s high of 3.72%. The sell-off has been uneven. Spreads between high grade bonds and the triple-B index have been quite low during the final years of the bond bull market. After all, it is abundant optimism that sets the bullish tone. Such optimism should result in small spreads between high grade and lower grade bond as worry would be low. Evidently the optimism of the bull has waned, and the bear is beginning to stir.

    Finding worthwhile bonds in this market is not easy and neither is navigating a bear market. There will be surprises. One thing is for sure, today’s market is unlike the past and portfolios built for yesterday’s bond bull market will most likely suffer the most.

    Anna Independent School District, TX

    Unlimited Tax School Building And Refunding, Series 2023

    Aaa (A+ Under) S&P

    Permanent School Fund Guaranteed

    Due 2/15   Dated 6/1/23 Maturity 2/15/53

    $49,345,000 Sold

    Years   Maturity           Coupon      Yield*

    1         2024             5.00%           3.54%

    2         2025             5.00%           3.44%

    3         2026             5.00%           3.27%

    4         2027             5.00%           3.16%

    5         2028             5.00%           3.10%

    6         2029             5.00%           3.06%

    7         2030             5.00%           3.00%

    8         2031             5.00%           3.02%

    9         2032             5.00%           3.04%

    10         2033           5.00%           3.07%

    11          2034**       5.00%           3.13%

    12          2035**        5.00%           3.21%

    13          2036**        5.00%           3.36%

    14          2037**        5.00%           3.53%

    15          2038**        5.00%           3.63%

    16          2039**       4.00%           3.98%

    17          2040**       4.00%           4.04%

    18          2041**       4.00%           4.08%

    19          2042**       4.00%           4.10%

    20          2043**       4.00%           4.10%

    25          2048**       4.125%         4.27%

    30          2053**       4.125%         4.32%

    *Yield to Worst (Call or Maturity) ** Call 8/15/33

    Source: Bloomberg

    This is an example of a new issue priced the week of 5/29/23

    Prices, yields and availability subject to change


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