Wednesday, August 7, 2024 |
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MANAGING DIRECTOR: |
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US Treasury Market |
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| Date | 1 mo | 3 mo | 6 mo | 1 yr | 2 yr | 3 yr | 5 yr | 7 yr | 10 yr | 20 yr | 30 yr |
| 07/31/24 | 5.37 | 5.29 | 5.09 | 4.75 | 4.26 | 4.06 | 3.91 | 3.95 | 4.03 | 4.39 | 4.30 |
| 08/01/24 | 5.35 | 5.26 | 5.02 | 4.63 | 4.15 | 3.96 | 3.84 | 3.88 | 3.98 | 4.35 | 4.28 |
| 08/02/24 | 5.33 | 5.18 | 4.84 | 4.37 | 3.88 | 3.71 | 3.62 | 3.67 | 3.79 | 4.18 | 4.11 |
| 08/05/24 | 5.36 | 5.21 | 4.88 | 4.40 | 3.92 | 3.78 | 3.64 | 3.69 | 3.79 | 4.17 | 4.07 |
| 08/06/24 | 5.33 | 5.21 | 4.95 | 4.50 | 3.98 | 3.82 | 3.73 | 3.76 | 3.89 | 4.27 | 4.18 |
The data in the table above is static as of the time it was pulled, so rates may have changed. Treat all data in this table and PMR as indications only and availability is
always subject to change. This information was pulled manually from sources we believe to be reliable. New source, as of 12/12/2022, Bloomberg, L.L.P. As of: close
of business 08/06/2024.
Those Who Forget the Past Are Doomed to Buy Bond Funds
President Harry S Truman observed that “there’s nothing new in the world, except the history you don’t know.” Right on Harry, tell it like it is…then let’s see if anyone remembers!
If it pleases the court of public opinion, enter into evidence exhibit #1: The Sentinel Short Maturity Government Bond Fund. In 2013 banks nervous about rising rates and wanting to stay short to avoid price depreciation purchased this fund (rather than buying bonds directly) with the expectation that interest rate risk would be supervised and diminished by virtue of Sentinel’s management directive. Summary literature professed that the fund “seeks high current income and limited fluctuations in principal value” and “invests at least 80% of net assets in U.S. government securities with average lives, at the time of purchase, of three years or less. The fund invests substantially in mortgage-backed securities.”
If it pleases the court of public opinion, enter into evidence exhibit #1: The Sentinel Short Maturity Government Bond Fund. In 2013 banks nervous about rising rates and wanting to stay short to avoid price depreciation purchased this fund (rather than buying bonds directly) with the expectation that interest rate risk would be supervised and diminished by virtue of Sentinel’s management directive. Summary literature professed that the fund “seeks high current income and limited fluctuations in principal value” and “invests at least 80% of net assets in U.S. government securities with average lives, at the time of purchase, of three years or less. The fund invests substantially in mortgage-backed securities.”
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Short duration
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AAA rated Government Bonds
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Professional Management
What could possibly go wrong?…As it turned out, quite a bit.
In May 2013, as then Fed Chairman Bernanke spoke his now (in)famous utterance on the possibility of the Fed “tapering bond purchases,” financial markets gasped and hiccupped as fixed income investors panicked and rushed for the exits. Indiscriminate selling and pain followed until it reached dual yield peaks/price lows on Labor Day and again on New Year’s Eve.
And how did the Sentinel Short Maturity Government Bond Fund fare? Not so well. A year after the “taper tantrum” this short duration fund had not recovered to its pre summer 2013 Net Asset Value (NAV). At the same time, investors who bought 3yr Treasury Notes in 2013 witnessed prices at new highs vs. summer 2013 levels. Adding insult to injury, the loss in the short duration fund is deemed a capital loss which could be offset by a capital gain…but not an ordinary bond gain which is treated as ordinary income. So a year later, not only was there still a loss in the fund even though short bonds were recovering, but it was a loss which was difficult to offset.
If it pleases the court of public opinion, enter into evidence exhibit #2: The Askin Capital Management Granite Fund. Turn your history pages (and Google search) back to 1993/1994 for an earlier version of the same story – though on a much larger scale and with commensurately worse consequences. Twenty years later, as President Truman predicted, the Sentinel fund drama is only new to those who didn’t know the Askin Granite Fund story first.
And finally, consider The Fidelity Intermediate Bond Fund (FUAMX). This is a plain-vanilla, uncomplicated short duration US Govt Bond Fund. Simple and (usually) no drama. Except for fact that it posts a 3yr return of -2.66%. From Aug 2021 to present day the fund NAV has dropped from $11.42 to $9.94, down -13%. Ouch! Meanwhile, the 0.75% Aug 2026 US Treasury Note, which issued in Aug 2021 very near $100-00 prices today near $93.750, down -6.25%. And while nobody likes red ink, the UST investor can closely predict improving future price action as the maturity approaches and the “pull to par” effect grows stronger daily. Whereas the fund investor has no assurance. Depending on market gyrations and the manager’s appetite for more or less churning of underlying assets, there’s no guarantee the NAV will recover to a previous high within a selected timeframe.
So, what’s the lesson? If you want short duration, buy short duration. Don’t complicate a simple solution with bells, whistles and moving parts. Buy a three year bullet today to wager a good night’s sleep and known outcomes that one year later you’ll have a two year bullet with less price volatility and perhaps, despite bad markets, the possibility of a small gain (depending on the shape of the yield curve).
Call your CCB rep for execution and peace of mind.
In May 2013, as then Fed Chairman Bernanke spoke his now (in)famous utterance on the possibility of the Fed “tapering bond purchases,” financial markets gasped and hiccupped as fixed income investors panicked and rushed for the exits. Indiscriminate selling and pain followed until it reached dual yield peaks/price lows on Labor Day and again on New Year’s Eve.
And how did the Sentinel Short Maturity Government Bond Fund fare? Not so well. A year after the “taper tantrum” this short duration fund had not recovered to its pre summer 2013 Net Asset Value (NAV). At the same time, investors who bought 3yr Treasury Notes in 2013 witnessed prices at new highs vs. summer 2013 levels. Adding insult to injury, the loss in the short duration fund is deemed a capital loss which could be offset by a capital gain…but not an ordinary bond gain which is treated as ordinary income. So a year later, not only was there still a loss in the fund even though short bonds were recovering, but it was a loss which was difficult to offset.
If it pleases the court of public opinion, enter into evidence exhibit #2: The Askin Capital Management Granite Fund. Turn your history pages (and Google search) back to 1993/1994 for an earlier version of the same story – though on a much larger scale and with commensurately worse consequences. Twenty years later, as President Truman predicted, the Sentinel fund drama is only new to those who didn’t know the Askin Granite Fund story first.
And finally, consider The Fidelity Intermediate Bond Fund (FUAMX). This is a plain-vanilla, uncomplicated short duration US Govt Bond Fund. Simple and (usually) no drama. Except for fact that it posts a 3yr return of -2.66%. From Aug 2021 to present day the fund NAV has dropped from $11.42 to $9.94, down -13%. Ouch! Meanwhile, the 0.75% Aug 2026 US Treasury Note, which issued in Aug 2021 very near $100-00 prices today near $93.750, down -6.25%. And while nobody likes red ink, the UST investor can closely predict improving future price action as the maturity approaches and the “pull to par” effect grows stronger daily. Whereas the fund investor has no assurance. Depending on market gyrations and the manager’s appetite for more or less churning of underlying assets, there’s no guarantee the NAV will recover to a previous high within a selected timeframe.
So, what’s the lesson? If you want short duration, buy short duration. Don’t complicate a simple solution with bells, whistles and moving parts. Buy a three year bullet today to wager a good night’s sleep and known outcomes that one year later you’ll have a two year bullet with less price volatility and perhaps, despite bad markets, the possibility of a small gain (depending on the shape of the yield curve).
Call your CCB rep for execution and peace of mind.
This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.
•Not FDIC Insured •No Bank Guarantee •May Lose Value