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Bondfire - Capital Market Update

Bondfire - Capital Market Update

October 05, 2023

“Breaking News! Stock and bond prices plummet on inflation concerns and skyrocketing interest rates!”

You’ll be forgiven for confusing the headlines from this week with the identical headlines from exactly a year ago. Yes, the details are different, in that last October and S&P 500 had a 24% decline from the January 2022 peak, vs. a 12% drop since July [i]. And yes, the massive increase in bond yields this year is the 10-30 year maturity bonds, vs the record-breaking increases in short-term rates last year. But the theme, and effect, has been the same.

But while the headlines and price declines may be the same, what we are doing about it in portfolios is very different, almost opposite, from last year.

First equities: last year when the stock market correction first hit -24% in June, we significantly increased equity allocation in our models (see our “Raging Bull” Capital Market Update 7/15/22). This time, with the S&P 500 still up almost 10% YTD and equity valuations still high, we’ve just gone from “no way” on adding more stocks a few months back to “maybe” now.

But bonds on the other hand…well that is something else entirely. For perspective, earlier today ten-year treasury bond yields were over a 4.8% yield (up from 3.2% just six months ago)[ii]. We haven’t seen bond yields at that level since 2007 which, considering that was right before the most catastrophic global financial crisis in almost everyone’s living memory, might as well be a different century as far as the financial markets are concerned.

Even more amazing (to me anyway), is that 30-year tax free municipal bond yields are currently around 4.5%! To put that in perspective, for those in the 37% effective tax bracket, you would have to get a 7.14 taxable yield to net out a 4.5% after-tax return. Considering that the 30 US treasury bond is now yielding only 4.8%, we now find long maturity tax free municipal bonds very attractive for high tax bracket clients to say the least[iii].

Does the above mean everyone, or anyone, should put all their money into long maturity municipal bonds? Absolutely not! Long duration bonds have risks like any other asset class, specifically interest rate risk which will cause long maturity bonds to lose value if long-term interest rates continue to rise (which happened both last year, and this year thus far). Also, long term municipal bonds might not be suitable for any part of a portfolio, depending on the investor’s tax rates, time horizon, investment objectives, and a slew of other factors.

For those investors who are a good fit for long duration bonds, and specifically long duration tax-free municipal bonds, have to offer, I haven’t been this excited about allocating to them in, well, 16 years.

As always, I am happy to connect and discuss the above, or any other area of interest. Thank you.

Very Truly Yours,

Jonathan Lonske

Managing Partner, Financial Advisor

Office/Cell: 857-328-1100

Schedule a meeting

125 High Street, Suite 220

Boston, MA 02110


[1]http://www.zerohedge.com/markets/its-deja-vu-all-over-again-futurestumble-yields-surge

[2]http://www.bloomberg.com/news/articles/2023-09-22/another-yieldhigh-as-us-10-year-jumps-above-key-4-5-level-in-post-fed-rout#xj4y7vzkg

[3]http://www.wsj.com/livecoverage/stock-market-today-dow-jones-10-02-2023