Municipal Letter Newsletter Sign-up >>>


With double digit price damage occurring at what many folks consider “low yields,” it should prepare bond investors for continued and greater carnage as yields continue their (so far) slow movement to more “normal” interest rates.

Treasuries Tank; Any Followers?

June 1st, 2018 by Kurt L. Smith
  • When it comes to interest rates you know we rejected the “lower rates for longer” mantra from the beginning. Largely this was due to the fact that we believed interest rates were bottoming and the new long-term trend of ever increasing rates, which we called in November 2012, was just beginning.

    The chart below details significant interest rates over the past five-plus years of our journey. Longer-term rates on ten year and thirty year notes and bonds challenged our premise briefly in 2016, allowing the “lower rates for longer” mantra to swell, but the results, or shall I say, performance, speaks for itself.


    All-Time Low Yield            June 2017  Low                       Recent High

    0.14%      9/20/11                1.26%    6/2/17                   2.60%    5/17/18

    0.53%      7/25/12                1.67%    6/14/17                2.95%    5/17/18

    1.32%      7/6/16                   2.10%    6/14/17                3.13%    5/18/18

    2.09%     7/11/16                 2.68%    6/26/17                3.26%    5/18/18

    -Source: Bloomberg


    Owners of ten year US Treasuries in July 2016 have watched the yield on their note increase an astonishing 181 basis points, for a 13 percent price decline in the note’s value (vis-à-vis the Treasury 1.625% 5/15/26). For owners of the bellwether thirty year bond, the 117 basis point increase in yield has lowered the bond’s value about 23 percent (vis-à-vis the Treasury 2.50% 5/15/46).  All treasury prices per Bloomberg.

    Double digit loses in longer-term treasury prices over the past two years are huge. Yet even at the most recent high yields lately of 2.60% to 3.26%, they continue to look low by historical standards.  With double digit price damage occurring at what many folks consider “low yields,” it should prepare bond investors for continued and greater carnage as yields continue their (so far) slow movement to more “normal” interest rates.

    Helping you avoid double-digit loses is but one of our goals navigating the bond market. Our number one goal is finding you worthwhile bonds that will perform well in your portfolio. The demand for yield continues unabated and while the performance of risk-free (credit-wise) US Treasury securities has suffered, the relative performance of seemingly everything else, continues.  Unlike the double-digit losses in US Treasuries over the past two years, most fixed income portfolios have performed somewhat better.  Other (non-Treasury) bonds are therefore valued more highly in the current marketplace, relative to (slumping) treasuries.

    This is the situation we now find ourselves in: with spreads to US Treasuries lower, we are therefore valuing other types of bonds more.  This is what I mean when I say the markets thirst for yield continues unabated.

    Remember my call in January for a bond market collapse to occur in 2018? So far, the march to higher yields has occurred steadily for treasuries and to a lesser degree for other bonds as demand remains steady as well. While bond prices, particularly longer-term bond prices, are lower, we have seen no collapse so far.

    While the rise in yields for the risk-free bond asset (US Treasuries) means lower prices for treasuries, it does not necessarily mean the same for all other, riskier bonds. One would expect a continued deterioration in treasury prices to eventually have an effect on other bonds, but timing is everything, as they say.

    Yet one scenario unfolding may be that as treasuries fall in price (rise in yield) this continued pressure on all other bond prices will eventually, perhaps suddenly take its toll. Spreads between treasuries and other bonds which have been tightening as treasuries have moved further, faster, may suddenly blow-out. Prices on other bonds which heretofore have moved slowly, may suddenly gap down in price, perhaps precipitating a bond market crash.

    One thing we have learned since the beginning of the bond bear market in 2012, and especially over the past couple of years, is how to continue to find worthwhile bonds for your portfolio. I don’t know the date of the next bond market crash nor the cause, but I do know we are closer today. As I said in January, crashes occur…regularly. We want our portfolio to be ready when the next one happens.

    The rise in interest rates, especially the past two years is beginning to take its toll. The double-digit losses have an effect upon performance, yet so far, other bonds have been hanging in there. But remember, these are markets and markets ebb, as well as flow.  We have come to expect surprises.  Every worthwhile bond we find is a nice surprise.  Your portfolio should be structured to take advantage of these opportunities.



    Van Vleck Independent School District, Texas

    Standard & Poor AAA (A+ Under)

    Permanent School Fund Guaranteed

    Due 2/15 Dated 6/1/18 Maturity: 2/15/2044

    Sale Amount: $38,085,000

    1 2019 5.00% 1.67%
    2 2020 5.00% 1.90%
    3 2021 5.00% 1.95%
    4 2022 5.00% 1.99%
    5 2023 5.00% 2.14%
    6 2024 5.00% 2.27%
    7 2025 5.00% 2.39%
    8 2026 5.00% 2.48%
    9 2027 5.00% 2.56%
    10 2028** 5.00% 2.62%
    11 2029** 5.00% 2.67%
    12 2030** 3.00% 3.00%
    13 2031** 3.00% 3.10%
    14 2032** 3.125% 3.20%
    15 2033** 3.125% 3.25%
    16 2034** 3.125% 3.30%
    17 2035** 3.25% 3.35%
    18 2036** 3.25% 3.40%
    19 2037** 3.375% 3.43%
    20 2038** 3.375% 3.45%
    26 2044** 3.50% 3.50%

      *Yield to Worst (Call or Maturity) **Par Call: 2/15/2027

    Source: Bloomberg

    This is an example of a new issue priced the week of 5/30/18

    Prices, yields and availability subject to change


    The $247 trillion global debt bomb…