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The story for me in the first three years the bond bear market has been the lack of sellers.

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.

    For those keeping score, the S&P 500 Index is trading almost exactly as one year ago and two years ago. At 4058 today, my Bloomberg screen shows minus 2.8% for one year and minus 3.08% for two years to be exact. Most investors appear content to ride through this period.

    For bonds, a dearth of sellers seems to be the story. The story for me in the first three years the bond bear market has been the lack of sellers. It does not take buyers to move prices up and it does not take sellers to move prices down. I generalize, but unlike stock prices, which is a record of exact trades, bonds are priced using a matrix with input from a sample of trades, not a trading record.

    Performance-wise, the bond market correction has certainly helped last year’s record (near record?) performance debacle. Net-net, one could use stock performance and bond performance interchangeably over the past year. For those of you looking for diversification, sadly this is not the case. Stocks and bonds appear to be correlated instead.

    The next move, after zig zagging away these past six-plus months, appears to me to be resolving back to the trend of downward prices in both stocks and bonds. Plan accordingly.

    Northside Independent School District, TX

    Unlimited Tax School Building And Refunding, Series 2023A

    Aaa (Aa1 Under) Moody’s AAA (AA+ Under) Fitch

    Permanent School Fund Guaranteed

    Due 8/15   Dated 4/1/23 Maturity 8/15/53

    $137,040,000 Sold

    Years   Maturity           Coupon      Yield*

    1         2024             5.00%           2.70%

    2         2025             5.00%           2.54%

    4         2027             5.00%           2.44%

    5         2028             5.00%           2.45%

    6         2029             5.00%           2.48%

    7         2030             5.00%           2.49%

    8         2031             5.00%           2.53%

    9         2032             5.00%           2.56%

    10         2033**         5.00%           2.62%

    11          2034**       5.00%           2.69%

    12          2035**        5.00%           2.82%

    13          2036**        5.00%           3.00%

    14          2037**        5.00%           3.15%

    15          2038**        5.00%           3.26%

    16          2039**       5.00%           3.32%

    17          2040**       5.00%           3.42%

    18          2041**       5.00%           3.45%

    19          2042**       5.00%           3.48%

    20          2043**       5.00%           3.53%

    22          2045**       4.00%           4.13%

    25          2048**       4.00%           4.22%

    30         2053**       4.125%         4.29%

    *Yield to Worst (Call or Maturity) ** Call 8/15/32

    Source: Bloomberg

    This is an example of a new issue priced the week of 4/17/23

    Prices, yields and availability subject to change


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