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Posts Tagged ‘treasury bill’

Come On In

December 6th, 2024 by Kurt L. Smith

One of the sales pitches for buying bonds (albeit an effective one) these past few years has been to buy bonds because now they earn you something. But while everyone knows 3% or 4% is greater than 1% or 2%, it is hardly a reason to do something silly.

The fact that interest rates were once near zero and now they are not should give you pause. Higher interest rates are not a recipe for bond investment performance. It was the trend toward lower interest rates over three decades that provided the wind in the bond bull market’s sails. With the new trend of higher interest rates, bond investors face headwinds that crimp performance.

Taking a longer-term perspective may help. The “higher” interest rates we now have are like where they were ten years ago. We buy a number of bonds issued ten or so years ago, so I am reminded daily. It also explains why the Bloomberg Municipal Bond Total Return Index for the past ten years is 2.73%. On December 2, 2014, the Index stood at 1064 and last week on November 29, 2024, it was 1355 (all prices and yields per Bloomberg). This Index covers the long-term tax-exempt bond market across four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds.

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Is This It?

September 25th, 2024 by Kurt L. Smith

For about eleven months now, bonds have traded higher in price and lower in yield in the most recent correction of the nascent bond bear market. From near 0% interest rates in 2020 to over 5% in 2023 in longer US treasury notes (below 0% to 5.50% for treasury bills), corrections are natural movements in how trends are developed.

While bond prices have rallied, we have also seen stocks hitting new highs as well. Even the Federal Reserve jumped on the bandwagon cutting rates this week to fulfill the promise made last month.

Yet for so much time, for so much work, the rebound in bonds looks pathetic. Most, if not all, of the rally occurred in the final nine weeks of last year. Our favorite long treasury bond, the 1.25% of May 15, 2050, traded at 43.25 on October 20th, 2023, and just over 55 on December 28th, weeks later. That’s a nice 27% gain for prescient traders, but a far cry from the 102 on August 6th, 2020 (all prices and yields per Bloomberg). This is what a bond bear market looks like.

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Fixin’ To

September 6th, 2024 by Kurt L. Smith

In late August we finally received the word from the mount on high. From his temporary perch at Jackson Hole, Federal Reserve Chairman Jerome Powell delivered his “time has come” speech. Treasury bills, the leader in all things short term, had obviously received advanced word as short-term interest rates broke to yearly lows.

Last month we noted treasury bills had fulfilled the requirements for a correction. We have long noted the key problem with corrections (like the problem with market tops) is it is tough to know how low low is (or how high high is). August brought us the strongest drop for yields in over a year as both three- and six-month bills hit new yearly lows. Chair Powell obviously noticed.

We are not treasury bill traders. Whether you are receiving a 2% taxable return on your cash in 2019 or 0% for the two years following the March 2020 beginning of the bond bear market, is not my primary concern. You would not have been happy then or even now when you are earning more. Selecting worthwhile municipal bonds is the key to your bond portfolio performance.

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Change Appears At Hand

July 31st, 2024 by Kurt L. Smith

In April my letter examined whether the Federal Reserve would begin cutting rates. Optimism abounded as the ten-year treasury note yield fell from 5% to 3.88% (prices rose) in the fourth quarter of 2023 (all prices and yields per Bloomberg). By April such optimism had taken a hit as higher yields (lower prices) left the bond market correction hanging on by a thread.

Since October of last year, the treasury market has been in a correction. From near 0% (0.31%) in March 2020 to 5% on ten-year treasury notes, the market was due, if not overdue, for a correction. Short term treasury bills had seen a similar run from negative yields on the six-month treasury bill in March 2020 to 5.59% in August of last year, with most of the move happening in the preceding twenty months.

The bond market correction has not only hung in, but treasury bills (three months and six months) hit their lowest yield (highest price) in the correction last week, completing an A-B-C correction. Three-month bills moved from 5.51% on October 6th to 5.28% this week, while six-month bills went from 5.59% to 5.12%. A ten month correction of a twenty month move? One can make an argument that short term treasury bills next move from here is toward higher interest rates not lower.

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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.

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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.

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