Posts Tagged ‘municipal bond market’

Your Reality Is Unique To You

October 8th, 2026 by Kurt L. Smith

On August 6th I published my letter Bond Bear Market Enters Next Phase. That letter was a follow up to my July 16th letter Treasury Prices Weaken, Municipals Yawn as we saw US Treasury bond performance lead the way lower. Yawn no more. The end of the third quarter has bond performance, across all sectors, showing losses at a historically significant pace, once thought to be reserved for the stock market.

Foreseeable? Why, yes. Unprecedented? No, this is what happens in bond bear markets. Our favorite bellwether US Treasury bond, the 1.25% of May 15, 2050, hit at a new low of 42.2 on October 1st. Yes, that is 42.2 cents on the dollar for a $73 billion bond maturity that sold at a 98.0343 discount new in May 2020 and an all-time high of just over 102 on August 7, 2020. This is what happens to long-term bonds when interest rates rise from less than 1.25% to 5.75% over a six-year period.

There need not be any sellers of this bellwether US Treasury bond for the price to fall so dramatically. Values can simply evaporate, as a fall from 102 to 42 can attest, as the market for long term treasury yields has sharply risen. But since these are US Treasury bonds, and the universe of US Treasury securities is only 1,251 CUSIPs, with approximately $33 trillion in face value, trades may have occurred regularly in the outstanding US Treasury securities throughout the downward trend.

Such cannot be said for municipal bonds. While trades of municipal bonds may figure into their pricing, municipal bonds are generally priced based on their coupon, maturity and call features (if any) with the assumption that the bonds did not trade (or need to trade) to determine a market price. Compared to US Treasury securities, outstanding municipal bonds number hundreds of thousands (over one million CUSIPs in Bloomberg’s database), and may not trade frequently enough to reflect changes in market yields through actual transactions. Market prices can (and do) simply evaporate based on valuation assumptions.

The lesson here, of course, should be to not own bonds where prices would fall if the trend to lower prices (higher yields) is the trend. Yet owning tax-free, as well as taxable, municipal bonds can be quite worthwhile, provided you select worthwhile bonds, especially when the market is entering the next phase of the bond bear market.

The market for bonds, in general, does not provide for such safety from price declines as we have seen bond market losses in US Treasuries, corporate bonds, municipal bonds, as well as mortgage bonds. In other words, bond market performance offers investors no simple place to hide. Long time readers and clients know this because bonds are managed in scale. If a manager performs well with $100 million in a bond portfolio, then here is a billion dollars for you to manage…until there is billions more to manage and so on. Bond portfolios generally can look like everyone else’s bond portfolio and hence everyone’s performance can begin to look alike.

Performance is tough to come by in a bond bear market. If it was easy, everyone would be doing it. But look around at whatever bond mutual fund, bond package, bond exchange traded fund, etc. you can find and you will find that many have experienced losses during this period.

This is not your reality as your returns are unique to you and you can find them on your monthly statement cover page every month. We are working the plan we have had for years now with results of compounding positive returns, not betting, or hoping, or calling the bottom, or doubling down on a market that many people refuse to see as a downward trending market. Individual results vary, and past performance is not indicative of future results.

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Bond Bear Market Enters Next Phase

August 6th, 2026 by Kurt L. Smith

I have been looking for higher interest rates since my Early Stages letter March 10th along with the follow up Wild Swing letter April 6th. The market has delivered. Across all maturities of U.S. Treasury securities, rates have jumped, bond prices have fallen, and performance figures for treasury investors renewed their downward slide.

Yet despite the rise in treasury yields, I did not believe they indicated the Federal Reserve should or would raise interest rates last week, even a small 25 basis points. So, guess the result? In my view, faced with an opportunity to lead (cut rates) or follow (like decades of Federal Reserve policy before him), new Chairman of the Federal Reserve Kevin Warsh chose to follow.

Traditional wisdom holds that the Federal Reserve can influence short-term rates, but it is the market that determines longer-term rates. At least the traditional wisdom is half right; In my view, the market controls all rates, and the Federal Reserve follows closely so not to lose what credibility it has.

In my opinion, the Federal Reserve’s credibility suffered greatly last week. With inflation running over the Federal Reserve’s target 2% rate for the past five years, treasury investors appear to be demanding more yield to compensate. But even with interest rates on ten-year and thirty-year treasuries trading near or at twenty-year highs, the question of how high inflation can run or how high is high for interest rates remains.

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Wow, Look at The Demand

June 17th, 2026 by Kurt L. Smith

If you have read any stories about the municipal bond market lately, chances are they include the words high demand and capital inflows. Investors love municipal bonds and are sending record amounts of inflows to all things municipal, particularly exchange traded funds.

The trend of higher demand for municipal bonds is not new. Some of these stories reference the best inflows (demand) since 2021 or perhaps the best demand ever. The 2021 reference should be a tell because municipal bond performance since 2021 has generally been challenged by rising interest rates. That year municipal bond yields went from near zero to just better than near zero, not exactly the time to be moving into any bond market.

The trend to watch in municipal bonds, as well as any bond market, is the direction of U.S. Treasury yields. Treasuries are the dog wagging the other bonds (municipals, corporates, and mortgages) tail. The trend for US Treasury yields has been up since 2020 but recency bias during the correction phase of the trend (2023 through early 2026) has been…exciting?

Long-term thirty-year bellwether treasury yields hit a nineteen-year high of 5.20% on May 20 while the two-year treasury note had a sixteen-month high of 4.20%. Throw treasury bill yields into the mix, and the overall picture suggests the market continues to assess the possibility of additional Federal Reserve policy tightening, which historically has created challenges for bond prices.

Indeed, municipal bonds are not treasury bonds, and that is exactly the reason that we are able to find worthwhile bonds in the municipal bond market. We have sought to find you worthwhile bonds in the middle of a bull market, at the height of the bull market, through zero to low yields, as well as whatever one wants to call 2026. This is how and why our approach to municipal bond investing often looks different from that of other professional managers.

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Going, Going, …

May 14th, 2026 by Kurt L. Smith

It is early in the baseball season, but the extreme optimism generally associated with Opening Day Baseball continues to be reflected in the financial markets. This is not especially new for the stock market, where elevated valuations have existed for so long that many investors appear accustomed to them.

Optimism has continued in bonds as well. March, one of the worst months for municipal bonds in recent years, was followed by a solid rebound in April. Demand for tax-exempt bonds has remained strong despite t continued issuance.

That has not necessarily been the case for US treasury securities. It is the bellwether bonds of the US treasury that are trying to cast a pall over the party. Today the ten-year treasury yield closed at 4.46%, a level not seen since last July. Similarly, the two-year treasury yield closed at 3.99%, a level not seen since last June. This has occurred despite the three Federal Reserve quarter rate cuts in September, October, and December of last year.

Many fixed income investors view higher yields as an attractive entry point. Their argument is that, for the better part of three years, the ten-year treasury yield has generally traded within a range of approximately 4% to 4.5% for the ten-year treasury. Therefore, all is normal, and at 4.46%.. From that perspective, current levels may appear consistent with the broader range that markets have experienced in recent years.

Taking the broader view, we have watched the ten-year Treasury yield move from .31% in March 2020 to 5.02% on October 23, 2023. After such a dramatic move higher, one might have expected interest rates to pull back over the following two or three years. Somehow 3.60% on September 17, 2024, just does not seem to be inspiring. Over the past year the ten-year Treasury yield tried to move to lower territory: 3.85% on April 4, 2025, 3.93% on October 17th, and 3.92% just a few weeks ago on March 2nd. Here we are at 4.46%…three strikes you’re out!?

There are tens of trillions of dollars invested in fixed income markets. Market trends and interest rate movements can have a meaningful impact on bond performance, particularly during periods of rising yields. Treasury returns over the past five years were negative at -1.30% per Bloomberg Treasury Index. Your coupons delivered some return, totaling 11.48%, but your price declined 13.29%. Just think about that. Over five years this is the math that is affecting fixed income investors.

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Early Stages

March 10th, 2026 by Kurt L. Smith

Last month I asked, “How About a Little Volatility?” Bonds, which reach one of their lowest volatility levels in over four years on January 26th, experienced a noticeable increase. It was the largest rise in bond market volatility since the beginning of spring last year.

Why does rising volatility matter? In my experience, periods of increased volatility can sometimes create additional opportunities in the municipal bond market. One way to think about it is similar to shaking a pecan tree; more shaking can sometimes produce more.

Another potential sign of change may be developing in the two-year US treasury note. After trading near historically low yields of approximately 0.10% on February 11, 2021, five years ago, the two-year yield peaked at 5.25% on October 19, 2023. Since then, yields declined (prices increased) for a period of more than two years, reaching 3.36% on March 2nd before moving back up to 3.63% this week.

Viewed over a longer time horizon, the trend of the two-year notes increased from approximately 0.10% to 5.25% before experiencing a multi-year pullback to around 3.36%. If so, this could portend higher short-term interest rates for the future as the trend reasserts itself and yields move to newer highs.

The two-year tax-exempt municipal yield has shown a broadly similar look to the two-year treasury note, going from approximately .03% on August 4, 2021, to 3.75% about two years later October 23, 2023. The index was 2.00% two years later on September 17, 2025, and 2.01% last week before rising with treasury yields to approximately 2.14%.

Comparatively, the 2.14% tax-exempt yield represents roughly 60% of the 3.55% on the two-year US treasury note. Depending on an investor’s tax bracket, time horizon, and investment objectives, one could wonder who finds 2.14% tax free for two years attractive. I sure do not, but demand from investors for municipal securities has generally remained steady, keeping spreads on municipal bonds tight compared to treasury yields.

We continue to find many worthwhile municipals compared to new issues (below) as well as the indices, yet we are cautious, and hopeful, that yields rise across the board from here. Setting the trend, correcting the trend, with both taking two years or so, appears to look complete. Yields on treasury notes and bonds as well as municipal bonds should move higher from here.

Higher yields can create headwinds for municipal bond mutual funds as well as managed products, particularly those that have benefited recently by adding duration by buying longer term bonds. As we have talked about these past couple of years, bond portfolio performance has been lousy since the end of the bond bull market in 2020, though the correction of the past two years has made recent returns somewhat tolerable. Mutual fund and managed fund performance could change dramatically if, as I expect, interest rates are now beginning their climb towards new higher yield territory.

The world is full of risks and investors have largely enjoyed the ability to ignore them. After setting the trend towards lower bond prices and higher yields, I believe the bond market is now poised to set new lows in price as yields work towards new highs.

Recent New Issue Example

Sheldon Independent School District Bonds

Series 2026

Aa3 Underlying Moody Aaa PSF Guaranteed

Due 2/15 Dated 4/1/26 Maturity 2/15/54

$58,815,000 Sold

Years Maturity Coupon Yield*

1 2027 7.00% 2.32%

2 2028 7.00% 2.33%

3 2029 7.00% 2.37%

4 2030 7.00% 2.40%

5 2031 7.00% 2.45%

6 2032 7.00% 2.53%

7 2033 7.00% 2.62%

8 2034 5.00% 2.69%

9 2035** 5.00% 2.79%

10 2036** 5.00% 2.88%

11 2037** 5.00% 3.00%

12 2038** 5.00% 3.13%

13 2039** 5.00% 3.25%

14 2040** 5.00% 3.34%

15 2041** 5.00% 3.44%

16 2042** 5.00% 3.57%

17 2043** 5.00% 3.72%

18 2044** 5.00% 3.87%

19 2045** 5.00% 4.03%

20 2046** 5.00% 4.18%

21 2047** 5.00% 4.27%

22 2048** 5.00% 4.33%

23 2049** 5.00% 4.36%

26 2052** 5.00% 4.44%

30 2056** 4.50% 4.50%

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

Source: Bloomberg

This is an example of a new issue priced the week of 3/2/26. Provided for illustrative purposes only and is not a recommendation to buy or sell any specific investment.

This commentary is for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any security. The views expressed are those of the author as of the date of publication and are subject to change without notice. Market conditions and economic developments may cause actual results to differ materially from those discussed. Past performance is not indicative of future results. All investments involve risk, including the possible loss of principal. Prices, yields and availability subject to change. Investment return and principal value of fixed income securities may fluctuate, and bond prices are subject to interest rate risk, credit risk, and liquidity risk. Index data is provided for illustrative purposes only.

How About a Little Volatility?

February 6th, 2026 by Kurt L. Smith

How About a Little Volatility?

At least with Groundhog Day, you know things are expected to change either sooner or later. Not so with markets. Solid demand for municipal bonds continues to keep that market moving forward along with stock market indices. We know what follows a low volatility period in markets: high(er) volatility. We just do not know when the change will happen.

In the metals market, the “when” came last week as silver plunged forty percent over a two-day period while gold “only” lost twenty percent. For those of you looking for alternatives out there, this is how markets work. Some happen quickly like the above metals, while Bitcoin and Oil have lost forty percent over a longer time frames with Bitcoin peaking in October 2025 and Oil in March 2022. All these markets have a way to go to catch our bellwether U.S. Treasury Bond, the 1.25% of May 15, 2050, which is back to trading below fifty cents on the dollar compared to the slight premium it traded at shortly after its issue in 2020.

Trends happen. Trends have been established in Bonds, though we know many argue that this is a buying opportunity. I am sure many continue to say the same about the markets discussed above. Things are beginning to happen, albeit slowly, particularly in the U.S. treasury bond market. Today, February 2^nd, the ten-year U.S. Treasury note closed at a 4.28% yield. This is the highest close since late August (save 4.29% on January 20^th). Why is this significant? The Federal Reserve cut its benchmark interest rate three times since late August, on September 17^th, October 29^th, and December 10^th, yet the ten-year note has failed to follow, reversing course after hitting 3.93% on October 17^th.

Expectations for further rate cuts by the Federal Reserve continue to be priced into the treasury yield curve. This is to say short term yields on treasury securities are low (3.5% to 3.8%, approximately) while longer term yields are rising now 4.25% to over 4.90%). But expectations are just that and they are subject to change, sometimes by a lot and sometimes quickly.

You have been lucky enough to live through one of the greatest asset price booms of all time. Owners of long-term bonds know, or should know, after almost six years since peaking that the price boom of Bonds is over, though investment professionals somehow continue to convince investors they should continue to own bonds. Hope appears to be their plan, and like expectations, hope can shrivel.

After huge moves in asset prices, Cash becomes king. Managing Cash through the tax-exempt, as well as taxable, municipal bond market is what we have been doing for our clients for many decades. We provide our clients with stability; your monthly statement is a testament to that. We continue to find select municipal bonds that we believe to be worthwhile in this market as well as for the trends that are established.

Copperas Cove Independent School District Bonds

Series 2026

AA- Underlying S&P AAA PSF Guaranteed

Due 2/15 Dated 2/1/26 Maturity 8/15/54

$79,110,000 Sold

Years Maturity Coupon Yield*

1 2027 5.00% 2.26%

2 2028 5.00% 2.26%

3 2029 5.00% 2.50%

4 2030 5.00% 2.50%

5 2031 5.00% 2.36%

6 2032 5.00% 2.44%

7 2033 5.00% 2.53%

8 2034 5.00% 2.59%

9 2035 5.00% 2.69%

10 2036 5.00% 2.77%

11 2037** 5.00% 2.91%

12 2038** 5.00% 3.07%

13 2039** 5.00% 3.19%

14 2040** 5.00% 3.31%

15 2041** 5.00% 3.47%

16 2042** 5.00% 3.60%

17 2043** 4.00% 4.00%

18 2044** 4.00% 4.10%

19 2045** 4.00% 4.15%

20 2046** 4.00% 4.23%

21 2047** 4.125% 4.31%

22 2048** 4.25% 4.37%

25 2051** 4.25% 4.48%

28 2054** 4.375% 4.52%

*Yield to Worst (Call or Maturity) **Callable 2/15/36

Source: Bloomberg

This is an example of a new issue priced the week of 1/26/26. Provided for illustrative purposes only and is not a recommendation to buy or sell any specific investment.

This commentary is for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any security. Past performance is not indicative of future results. All investments involve risk, including the possible loss of principal. Prices, yields and availability subject to change. Investment return and principal value of fixed income securities may fluctuate, and bond prices are subject to interest rate risk, credit risk, and liquidity risk. Index data is provided for illustrative purposes only.

Exuberant Optimism

January 9th, 2026 by Kurt L. Smith

The financial markets continue to reflect a high level of optimism. Stocks had good performance in 2025 and developments in artificial intelligence is on fire. There is so much optimism in financial markets that it even bleeds into the bond markets.

Many investors seem to be content with their portfolio and very few seem to be making, or willing to make, a meaningful change in their portfolio mix. The one message that seems to resonate with me is this: stay the course.

This is the message that a lack of pain delivers. Bumps in the road have been merely that; bumps in the road. The last umpteen years have been a financial planner’s dream. As a result, many long-term financial plans remain on track. However, it is important to review portfolio components individually rather than relying solely on overall results.

This is not what bond performance figures tell us. When examined independently, bond performance has been more modest compared to stocks. Looking at the municipal bond market, the Bloomberg Municipal Bond Index reports the following compounded returns: 4.25% for one year, 2.63% for two years, 3.87% for three years, 0.80% for five years, and 2.34% for ten years. Index performance does not reflect the deduction of fees, expenses, or taxes, and investors cannot invest directly in an index. Actual investor results may vary, particularly in separately managed accounts (SMAs) or mutual funds where expenses apply.

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Interest Rate Cut Coming Wednesday

December 9th, 2025 by Kurt L. Smith

Short term U.S. Treasury yields continue to fall paving the way for another twenty-five basis point interest rate cut by the Federal Reserve at this week’s December 10 meeting. the six-month treasury bill fell from 5.59% August 29, 2023, to a new low of 3.68% last week, taking money market yields lower as well.

In a report issued by Crane Data on December 3, money market mutual fund assets recently broke the $8 trillion level for the first time, up from $6 trillion in August 2023 and $4 trillion in 2020, the COVID year. Cash may not be king, but these levels dwarf the $4 trillion-plus municipal bond market.

Obviously, investors of cash are willing to accept less returns as rates on short term securities and money market mutual funds have decreased since the Federal Reserve began cutting interest rates from 5.50% in September 2024 to perhaps 3.75% Wednesday. But unlike their long-term bond brethren, lower rates on money markets do not equate to higher prices and better performance. Lower rates on money markets merely gets you less: lower yields earn you less return.

This explains why longer-term bonds continue to be a high buzz asset class. Best to lock in these higher yields on longer bonds before they too shrivel like money market yields. We have only one month left in 2025 and if longer term interest rates can just hold in there, then purveyors of bonds will have 2025 performance figures to hawk further into 2026.

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Far From A Foregone Conclusion

October 31st, 2025 by Kurt L. Smith

Federal Reserve Chairman Jerome Powell opened his remarks following the October 29^th quarter point interest rate cut saying: “A further reduction in the policy rate at the December (10^th) meeting is not a foregone conclusion, far from it.” I am not a Fed watcher, but I applaud a statement that at least appears to be forceful.

Mr. Powell may be frustrated in my opinion. The Federal Reserve has cut the target interest rate 150 basis points, from 5.50% in September 2024 to this week’s 4%. What does the Federal Reserve have to show for it? When your mandate is to keep inflation low and employment high, I think the Federal Reserve should be frustrated, particularly when your declared inflation goal is 2% and we have not sniffed that level in years.

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Something Is Changing

October 8th, 2025 by Kurt L. Smith

You are not reading this letter for advice on the stock market or crypto so obviously that is not what I am talking about with respect to change. The change I am talking about, of course, is regarding interest rates. On September 17, 2025, the Federal Reserve reduced the federal funds rate by 25 basis points cut on September 17^th as anticipated. Odds are currently high for another 25 basis point cut on October 29^th (94.6% odds of cut per Bloomberg as of October 7, 2025).

We have talked about short-term cash yields and how the trend there has been lower. But the low yields for the past six months occurred on or about September 17^th. On the short-term side, six-month US treasury bills bottomed at 3.75% on September 16^th and are basically flat since, hence the continued high odds for another rate cut at the end of this month.

Yields on longer term US treasury ten-year notes hit their six-month low on September 17^th, and just as I told you last month, yields have bounced higher since. This is early stage, but so far, the ten-year yield has done everything a change in trend needs. Look for higher yields on the ten-year note throughout year end and beyond.

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Latest Newsletters

Posts Tagged ‘municipal bond market’

Your Reality Is Unique To You

Bond Bear Market Enters Next Phase

Wow, Look at The Demand

Going, Going, …

Early Stages

How About a Little Volatility?

Exuberant Optimism

Interest Rate Cut Coming Wednesday

Far From A Foregone Conclusion

Something Is Changing

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