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Posts Tagged ‘municipal bond market’

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?

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Zig Zagging Away

April 27th, 2023 by Kurt L. Smith

As discussed last month, the correction continues. Stocks are trading about the same as where they were five months ago. Bonds are mostly higher, but the last three months have been volatile. Bottom-line, corrective periods such as these usually resolve in the direction of trend.

Volatility in bonds, as measured by the ICE BofA Move Index (all prices sourced from Bloomberg), showed the most volatility since the bear market began in 2020. The recent volatility began as the two-year treasury note yield bottomed in early February at 4.03%, spiking to over 5% on March 8th just as the news of the troubles of the Silicon Valley Bank began to hit. A wicked reversal ensued, with yields bottoming at 3.55% just a couple of weeks later March 24th. With two-year yields moving from .10% on January 5th, 2021, per Bloomberg’s Generic Two-Year Index, to 5.07% on March 8th, 2023, one might have expected a correction. So far, we have seen 3.55% on March 24th.

Looking at longer bonds, where price fluctuation matters, the correction on the US Treasury bond future began with a low October 24th, 2022 at 117-19 with a correction high of 134-14 on April 6th, a rise of about fifteen percent. The contract had closed within 2% of this high on four earlier occasions since mid-December, pulling back each time.

This bouncing back near its high pattern is like what we have seen in stocks: a market seemingly going nowhere. What we have been doing is marking time. As investors experiencing a bull market for many decades, marking time has been acceptable because the trend was upward in the bull market.

Now that we are solidly in a bear market pattern, marking time is an opportunity to evaluate where you are as the next move usually resolves with the trend. As with any correction, the question becomes when? We may not remember how awful stock market performance was back last October, but then bang, the correction started. This, unfortunately, is usually how it ends as well. Be prepared.

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Now It Gets Interesting

February 17th, 2022 by Kurt L. Smith

Long-term investors, I mean old investors, have experienced market reversals. As night becomes day, market selloffs lead to new, higher prices. This law of nature does not apply to markets, though one’s experience tells one otherwise.

Over the last 40 years we have seen downdrafts leading to new highs. You remember the dates: 1987, 2000, 2007, and lately, 2020. What you may not be aware of is the same dates also saw similar action in bonds. The long-term bull market for stocks was mirrored by bonds. Bond and stock performance marched ever upward, together…until they did not.

I have worked hard to let you know the bull market in bonds is over. Yields traded at such a next-to-nothing interest rate in March 2020 resulting in record high bond prices. Compared to the double-digit yields of the early 1980s, which equated to record low bond prices, I believe the bond market has completed its long bull market journey. The bond bull market is over, and you should not own bond mutual funds.

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Bonds Continue Their Roll (Role)

December 29th, 2021 by Kurt L. Smith

Another year, another dollar. Certainly explains the bond market.  As no-to-low yields continue to dominate the bond market, a dollar is about what many new bonds will pay you. And with little volatility, like stocks, total returns were positive. In other words, bonds fulfilled their role.

Only the US Treasury Total Return was negative this year, with Corporate Bonds and Municipal Bonds positive per Bloomberg’s indices. The US Treasury performance, while a loser, didn’t lose much year-over-year. With the melt-up of 2019 culminating in March 2020, US Treasury bond (past) performance looks stout. Again, bonds did their job.

But at current no-to-low yields, past performance is priced in. Many investors will look at the year and probably make few, if any, changes.  Why change what is working? There is no need to dump bonds as they have seemed to do their job, fulfilling their role.

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Never Sexy

September 6th, 2018 by Kurt L. Smith

Another month, another summer. I hope your summer was worthwhile, mine certainly was. Usually things run slower during the summer months and again that was true in our little corner of the market. Yet, despite no one quite knowing how municipal bonds “work”, they continue to do so. For us anyway.

While some stock indexes hit new all-time highs last month, that doesn’t equate to much change at all over the past six months. Some say the same thing about municipal bonds, even the ones I’ve found for them, but these folks are thinking short-term. I don’t deal in the latest, shiniest object. Nothing sexy here.

Cash and cash alternatives are rarely sexy. Yet this is the asset class which I believe is rising in prominence and will continue to do so over the next number of years. It is also an area of expertise that not many people possess.

Anyone can buy treasury bills, short-term notes and bonds and call it cash alternatives. Do it for as long as you want, then let’s compare your returns. Oh, you’ve come up with a new way to skin a cat…. again let’s compare returns. (more…)

Thankfully, We Own Municipals

May 4th, 2018 by Kurt L. Smith

Three percent ten year US Treasury notes have generated recent buzz with the highest interest rates in over four years. More interesting may be the yield on two year treasury notes at over 2.50%, the highest yield in over nine years.

Lower for longer? This mantra for investing in both bonds and stocks has blown up. Interest rates are not lower and haven’t been lower for many years. My job is not to convince believers of the mantra that they have it wrong. Besides, despite rising interest rates, performance figures haven’t changed appreciably one way or the other. We continue to move forward with our approach.

Our municipal bond market is a relatively puny player in the world of financial assets. With $3.8 trillion outstanding in municipal bonds, municipals make up a small portion of the $40 trillion US bond market (SIFMA). Black Rock and Vanguard each manage more financial assets than the entire municipal bond market.

In the scheme of things, municipals do not matter. In the great buildup of the $40 trillion US bond market, municipals have become but a rounding error or an opportunity for diversification, whether warranted or not. (more…)

Not The Same As The Old Year

January 11th, 2018 by Kurt L. Smith

Happy 2018 to you and yours! I hope 2017 was a good year for you and may 2018 be wonderful.

One always tries to keep the wind at your back and this appears to be the consensus with investors. Optimism is extremely high and the business press (and stock market performance) reflects this sentiment.

This is the definition of trend. To be the trend it must show general tendency AND it needs to continue long enough to get noticed. The trend is your friend because you are an investor, not a trader. The trend can provide you sound grounding to make decisions as well as a framework for what may come.

These past several months we have discussed the next move in the continuing trend for bonds as well as a change in the trend for stocks. Bonds hit their high in price (low in yield) on September 8th. Since then, rates have slowly risen, while I believed they would move up faster. The ten year US Treasury was 2.01% in September, a 2.47% high in November and a new 2.50% high in December. Two year treasuries were 1.25% in September, 1.78% higher in November and a new 1.92% high in December and 1.97% this past week.

The reason I continue to write about bond yields is because it is important to know the trend. I marked the end of the bond bull market back in 2012. Buyers of long-term bonds back in 2012 invested in low yields, their current bond value is less to boot as rates have risen and bond prices have fallen. (more…)

Moving Ahead

August 3rd, 2017 by Kurt L. Smith

Narratives make great stories, coaxing investors to invest but rarely the impetus to sell.  Narratives, the stories about why the market is behaving this way or that, add fuels to the fire of salesmanship and lines up well for the growing herd, the multitude of trend followers. 

The great narrative of the past few years has been yields are (and will forever be) low, so you should add riskier assets to your portfolio. This narrative has been in place so long ( for years) it appears it will never change.

Our approach shows otherwise. In the incredibly unique world of municipal bond investing, opportunities have existed in high quality credits that are not available in any other asset class. In a world focused on scale, size, generic products and spread, the municipal bond market offers this as well as alternatives to this. (more…)

The Plan Unfolds

July 13th, 2017 by Kurt L. Smith

It has been twelve months since the end of the hockey-sticked shape mania of long-term bond prices. Markets don’t trend in straight lines, so over the past twelve months I have used this letter to help you navigate where we are on the journey towards a collapse in long-term bond prices.

The July 2017 letter called the top in long-term bond pricing while subsequent letters followed the initial move to December lows and last month’s call that the correction was over. After a correction price high on June 12th, long-term bonds have declined in price for the past twelve trading days (as of the writing of this letter).

Of course it may be better to be lucky than good, but I will accept any good fortune that comes our way. This letter provides me the opportunity to put forth my opinion, however much in the minority it may be, and I intend to take the opportunity because I believe it is quite important when a collapse in the long-term bond market is involved. (more…)

A Buy and Hold World

May 5th, 2017 by Kurt L. Smith

The municipal bond market is not so much of a market as it is a distribution scheme. Each week new issues of municipal bonds are sold, or distributed, to buyers looking for bonds like these offered. The bonds may disappear immediately or usually they are all distributed to buyers over several weeks.

The end result is the bonds are distributed. We can’t control whether or not any bonds are later offered or enter the marketplace. Last month I wrote that it only takes one: one bond coming back into the marketplace that may prove to be worthwhile for us.

This means the bulk of all municipal bonds are bought and held. With long-term bond yields trending down for thirty-plus years (and prices trending higher), a buy and hold strategy has been a winning strategy.

Yet somehow, someway, bonds come into the marketplace each and every day in an attempt to be redistributed. Thankfully not every bond holder buy and holds, so at least we get an opportunity to see if the bonds they are selling are worth buying. (more…)

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