What’s going on in the bond market?

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The bond market has taken a turn over the last few weeks. There are a number of reasons for this decline, with the obvious being we have a new President-elect that may not be as accommodating to the notion of unlimited government bond buying to artificially depress lending cost.

Now, the market is readjusting to what a “real” interest rate should be without Fed intervention. The results have been dramatic.

The 10-year Treasury is down 5 percent over the last 10 days and the 30-year Treasury is down over 7 percent. Are these overdone? Maybe a little, but I think the market is going in the right direction. Levels have been artificially suppressed for too long and we are going back to normalization.

During this time, our corporate bond portfolios have held up well because they have an average duration of one and a half years, but municipal bonds have not because the durations are longer at around 10 years. (There are no short municipals in a decreasing interest rate environment because they’ve all been called).

Securities that we have purchased and held for a long period of time have built up pricing protection and won’t be as impacted. However, the newly purchased securities that aren’t seasoned will feel the full impact.

As we’ve been saying, even when the muni bonds were up 7 percent, the unrealized swings are noise around what our primary goal is of getting a reasonable yield and protecting principal. These two goals have not changed – we are having an interest rate adjustment, not a credit adjustment.

 

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