The Knowledge Vault
Newsletter Sign-up >>>

 

Latest Newsletters

Posts Tagged ‘Municipal bond’

Managing Municipal Bond Portfolios

June 28th, 2024 by Kurt L. Smith

It seems we cannot get enough of municipal bonds, taxable or tax free. The deals keep coming, the orders overflow, and some even get filled. Shampoo, rinse and repeat.

More demand than supply should keep bond prices buoyant. Unfortunately, financial products do not work that way. Wall Street’s job is to supply more when demand is high, and Wall Street is doing exactly that by creating more and more bonds (debt) to keep up.

Demand is high so municipal bond deals are large as well, some well over a billion dollars. According to Joe Mysak, Bloomberg’s long-time resident municipal bond market expert, this week marked “the 27th deal of $1 billion or more, with overall borrowing accelerating at a torrid pace.” Amazingly, the municipal bond market remains around $4 trillion, the same as 2020, according to SIFMA website. Actual current figures are $4.1 trillion, the same as two years ago and barely higher than $3.9 trillion in 2019. So perhaps the $200 billion difference is due to larger deals! Shampoo, rinse and repeat as old bonds mature and they need to be replaced.

So how does one manage municipal bond portfolios? Largely they are managed with scale. This is where new deals like this month’s Eagle Mountain – Saginaw ISD featured bond comes into play. The best time, perhaps the only time, to buy a $5 million, $10 million, or $25 million piece is when they are first distributed. This is not new. The new issue market has been on the shampoo, rinse repeat treadmill for many years.

(more…)

Everyone (It Seems) Loves Municipals

May 29th, 2024 by Kurt L. Smith

After many months of expensive pricing relative to treasuries, municipal bond prices began to capitulate this week. Together with treasury price weakness, longer term municipal bond prices are breaking down with yields jumping upwards.

Last month we discussed that the bond market correction was hanging on by a thread. By mid-month it appeared the correction phase was intact as ten-year treasury yields moved from 4.73% on April 25th to 4.31% on May 16th (all prices and yields per Bloomberg). The spirited move saw some sympathy with two-year treasury notes (from 5% down to 4.70%), but just a few days later the two-year note is back to 4.95% on May 24th.

Remember, it is the shorter-term treasury yields that shape Federal Reserve policy, not the other way around. With short-term treasury bills and two-year notes at or near their highest yields for the year, this trend is not encouraging.

If there is such a thing in the bond market as everyone on one side of the boat, it is the duration trade. With yields on bonds at levels investors have not seen in years it seemed to make sense to buy some longer bonds to take advantage when the Federal Reserve lowers interest rates again. This could help explain bond prices rallying nicely in last year’s fourth quarter. Municipal bonds were trading about 75% of treasuries (ten-year maturity basis) to begin the move in October and later hit a record low of 57% in March, further amplifying municipal bonds bounce up in prices.

(more…)

High Flying Municipals

April 26th, 2024 by Kurt L. Smith

I continue to find worthwhile municipal bonds for clients despite the historically expensive pricing of generic municipal bonds. While treasury securities are at their highest yields (and lowest prices) in over five months, municipal bonds continue their relative pricing superiority.

Packages of municipal bonds, such as mutual funds and exchange traded funds (ETF’s), are priced high relative to their historical averages to treasury securities. Such high prices have helped their performance relative to other fixed income securities.

Today, the ten-year AAA municipal yield of 2.74% is but 59% of the 4.64% of the ten-year treasury note (all yields and prices per Bloomberg). As we have talked about recently, if such spread was even 70% (much less of a historical outlier), municipal yields would need to rise about fifty basis points to 3.25%. Lower actual yields mean municipal bond prices are priced higher, thus contributing to positive performance of late.

(more…)

Rate Cuts? Not So Fast (Obviously)

April 3rd, 2024 by Kurt L. Smith

Writing about market corrections is hardly exciting. Investors want to know where a market is going and when. The exciting part is when forward steps are being taken, not the times when the market takes a step back.

After almost forty years of making headway towards lower and lower yields, the market has reversed from 2020 to 2023 as yields rose from near zero to something substantial. Ten-year treasury note yields went from .31% March 9, 2020 to 5.02% on October 23, 2023 (yields and prices per Bloomberg). Shorter term yields, like three-month treasury bills, were negative in March 2020, rising to 5.51% last October 6th.

These were many steps forward in the new trend of higher yields and lower bond prices. But markets do not move in straight lines. A trending market needs to correct, taking a step, or maybe steps, back.

Here is the bad news. Corrections allow the trend to continue. From October 23rd to December 27th, the ten-year treasury yield fell from 5.02% to 3.78%. This correction generated a lot of excitement, particularly from those investors who own long term bonds at substantially higher prices purchased when rates were low. Lower yields boosted longer bond prices in the process.

(more…)

The Right Bond, Part 2

February 29th, 2024 by Kurt L. Smith

Interest rates on ten-year U.S. treasury notes are closing out the month of February near their highest in three months. Not so for municipals. New issue municipals, usually the driver or yardstick for other municipal bond prices and yields, continued to trade near record relative values.

While ten-year U.S. treasury yields began the month near 3.90% and spent most of the last two weeks at or above 4.25%, municipal yields went the other way. We can compare Wylie TX ISD in Collin County, on the east side of Dallas, with last month’s Wylie TX ISD in Taylor County, on the south side of Abilene. Yields are lower across the board on this week’s Wylie compared to last.

Today, February 28th, the ten-year AAA municipal-treasury ratio was below 60% at 59.6. This ratio was consistently above 80% for the last twenty-plus years, save the past three. Asset values, including municipal bonds, were quite volatile in the period of the lockdown in 2020 when U.S. treasury yields plunged to near zero percent and bond prices hit their bull market highs. But as the market settled down, it appears investors have a desired preference for municipal bonds making the 80% ratio the new high rather than the old low.

(more…)

The Right Bond

January 31st, 2024 by Kurt L. Smith

We began 2024 with municipal bonds having rallied, not just in price, but also relative to U.S. Treasury yields. Ten-year generic AAA municipal yields were 3.62% on October 23rd and 2.35% on December 23rd (all prices and yields per Bloomberg). Compared to treasury yields, the 2.35% on municipals was 62% of the 3.78% on treasuries.

Municipal bonds are spread product. Investors like us buy them because the bonds offer a spread (better yield) to the so-called risk free U.S. Treasury bonds of a similar maturity. At 62%, municipal bonds offer some of the smallest spreads in decades yet investors continue to buy. Bloomberg’s Joe Mysak noted this last week, saying “if munis revert to their long-term valuations, or around 85% of treasuries, they should yield more than 3.50% right now…there’s still a long way to go.” Yields have bumped up slightly. Look at this month’s new issue highlight: the Wiley Independent School District in Abilene, TX bonds below. But as Mysak says, they still have a ways to go.

Yields on municipals continue to be much higher than those we saw in 2020, 2021 or 2022, though on a relative basis they are quite expensive. Tens of billions of dollars of new issue long-term municipal bonds were priced in January. They do not need our help getting them sold. Municipalities never need our help, whether interest rates are low and going lower or high and going higher.

(more…)

As The Bull Turns

August 29th, 2023 by Kurt L. Smith

Our watch of longer-term US treasury bond prices has shown treasuries to be the leader in the new bond bear market. Our stance has been that the move up in bond prices from the October 2022 low was merely a correction. Indeed, bond prices gradually weakened over the past six months to within spitting distance of the October lows. In August we saw longer term treasury bond prices break those lows.

Ten-year treasury notes are trading at the lowest prices since 2007 and the thirty-year bellwether treasury bond is at the lowest level since 2011 (all prices and yields per Bloomberg). Bloomberg ran a chart headline last week saying, “Great Bond Bull Market Ends.” You have known this for years; we pronounced it in our March 2020 letter.

Leadership is great but it also must be heeded. We live in a bull, bull, bull, bull, world, and other markets have been slower to recognize the bull market is over and the bear market is here. Believers and buyers of corporate and municipal bonds abound, not wanting to miss yields that have not been seen in, literally, decades. Demand is strong, supply is weak, and spreads on other fixed income sectors are tight. This is not indicative of the bear market; it is the last gasp remnant of the bull market.

(more…)

Why Municipal Bonds?

June 23rd, 2021 by Kurt L. Smith

The obvious answer to the question “Why municipals?” is they are tax-free. That is a good reason, especially if the benefit is greater than the alternatives. From the days of double-digit yields of the early 1980’s the added benefit of the tax-free feature has almost always been worthwhile to investors in the highest tax brackets.

Of course, an almost forty year bull market for bonds helps as well, but that is over. Bond performance no longer has the wind to its back; bond performance now faces many headwinds. Selection is key no matter the market, but in today’s new bond market, selection is paramount.

The final stages of the bond bull market have wreaked havoc with investment managers and their investor clients. Where is the yield and what has performed well in these final throes of the bull? You know it is junk, or high yield. For municipals this means prisons, nursing homes, dormitories and other housing or land-based, new projects. For corporates, well you can find lower rated credits across industries.

(more…)

March 6th

March 30th, 2020 by Kurt L. Smith

I pray this letter finds you and your loved ones healthy. My prayers are with the first responders and the healthcare professionals on the front-line saving lives and protecting ours.

This is the most important letter I have ever written. My hope is you will pass it along to your loved ones and friends because I believe the message is very important.

I have spent my entire career, over thirty years focused on the bond markets. Long-time readers know I have been writing that the latest move in financial assets (stocks, bonds, gold) is the end of something, namely the end of their long-term bull markets. As tens of billions of dollars is now being poured into cash in the form of money market accounts, it appears some may agree, and they may be scared as well.

I know you have a choice with your money, and I appreciate your trust in me and my abilities especially in these volatile times. I believe it is important for you to more fully understand bonds as well as sharing this letter with others who may find it helpful.

In the United States, bonds account for about $33 trillion dollars in assets: US Treasury securities make up about $17 trillion, corporate bonds $10 trillion, mortgages $10 trillion and municipals $3.9 trillion (all courtesy of SIFMA.org). The Federal Reserve has recently increased its balance sheet to $5 trillion, primarily in US Treasuries and mortgages (courtesy federalreserve.gov) leaving a lot of bonds in other’s hands with the bulk either professionally managed including in mutual funds.

Mutual funds, with their quoted net asset values (NAV) and performance data available on the internet may appear to be similar as both can easily be reallocated with a point and a click.  Both have the same disclaimer: “Past success does not guarantee future performance.”  But they are as dissimilar as a stock is from a bond.

(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…)

NEWS FEED

Tweetomatic error: Could not authenticate you.