Global bond markets have experienced notable volatility to start 2025, particularly following President Trump’s tariff announcements on Liberation Day. Concerns around the fiscal deficit and inflation expectations have led to continued volatility, even as tariff negotiations occur. We believe this volatility has created attractive opportunity for bond investors, particularly within our Interest Rate Offense sectors.
Tax-Exempt Municipal Bonds:
1. The current yield on a benchmark AAA-rated, 20-year Tax-Exempt Municipal bond is at levels only seen in three other instances over the last 15 years.
2. The spread for a 20-year Taxable Equivalent Yield compared to the 10-year U.S. Treasury Yield is at historically high levels.
3. The yield curve roll potential provided at the 20-year spot of the benchmark AAA curve is at levels rarely presented over the last 15 years.
Past performance does not guarantee future results.
U.S. Treasuries
The 20-year Treasury was reintroduced in 2020. Since its reintroduction, it has typically yielded as much, if not more than the 30-year Treasury because it is somewhat regarded as the “ugly stepchild” to the more favored 10-year and 30- year bonds. While we currently favor the return potential found at the 20-year spot on the curve to the 30-year, we can use the 30-year Treasury’s longer history to illustrate relative attractiveness representing the long-end of the Treasury curve.
- Excluding a few weeks in October 2023, the yield on the 30-year Treasury is the highest it’s been since 2007.
- The yield curve roll presented at the 30-year spot on the curve (measured by the 30-10 spread) is at the highest potential since October 2021. At that time, rates were roughly 300 basis points lower than they are today.
Past performance does not guarantee future results.
Taxable Municipal Bonds:
- Taxable Municipal bonds spread off the Treasury curve and have the potential to benefit from the same steepness we love at the 20-year spot on the curve.
- We find selective exposure to Build America Bonds can maintain high credit quality exposure while potentially mitigating spread widening risk at a time when spreads are tight across many sectors.
- The average yield on our AA-rated Taxable Munis is roughly 6% which we believe is very attractive, especially considering the high credit quality in Munis.
A key principle of Shape Management is to combine bonds with complementary characteristics in a portfolio. We consider bonds that are more interest rate sensitive to be “offense” for our portfolios. With high yields and steep, attractive slopes, we think some of our favorite forms of offense are among the most attractive levels seen in years.
In fact, over the last 20 years the S&P 500 has averaged a roughly 8.5% annualized return. If rates fell moderately over the next 3 years, roughly 50 basis points a year –less than the average intra-year swing –the potential return for these bonds is in excess of8.5%. The opportunity in our favored Interest Rate Offense aims to present equity-like return potential for high quality, AA-rated bonds if rates fall moderately.
GLOSSARY
Yield Curve refers to the U.S. Treasury yield curve rates.
RISKS AND OTHER IMPORTANT CONSIDERATIONS
Investing involves risk; principal loss is possible. Investments in debt securities typically decrease in value when interestrates rise. This risk is usually greater for longer-term debt securities. Investments in lower rated and non-rated securities present a greater risk of loss to principaland interest than higher-rated securities. Investments in asset-backed and mortgage-backed securities include risks that investors should be aware of such as credit risk, prepayment risk, possible illiquidity and default, as well as increased susceptibility to adverse economic developments. For a complete list of disclosures, please visit www.ptam.com.
When selecting a bond to invest in, most investors rely on what we refer to as “traditional fixed income metrics,” which are generally a combination of (1) taking a stance on whether interest rates will increase or decrease, (2) yield and (3) duration. Nearly 30 years ago, PTAM’s founders recognized the potential shortcomings in traditional bond metrics, and developed Shape Management, a math-based investment process that addresses each ofthese shortcomings by analyzing the risk return profile of a bond’s future cash flows. Shape Management is a mathematical calculation that analyzesthe risk return profile of a bond’sor group of bonds’ future cash flows. By using Shape Management, PTAM creates projections of the performance of specific bonds or grouping of bonds. These projections are not the actual performance of any bond or product. As a result, Shape Management performance in this email were not actually achieved by any PTAM investment or product. The criteria and assumptions underlying the projected performance may prove to beincorrect. Prospective investors should not rely solely on such projected performance and should conduct a thorough independent analysis of the investment opportunity. The graphs included throughout this email are provided for illustrative and educational purposes only. Projected performance results mayhave many inherent limitations. No representation is being made that an investment will, or is likely to, achieve profits or losses similar tothose shown. In fact, there are frequently significant differences between projected performance results and actual results subsequently achieved. Although projected performance may be useful to consider when making an investment decision. Investment decisions based on Shape Management information may not be profitable. All projected performance is shown as net performance, which includes management fees, reinvestment of interest payments, principal payments, and capital gains.
The information included is not an offer, recommendation or professional advice. Certain information contained herein has been obtained from third party sources and such information has not been independently verified by PT Asset Management, LLC. No representation, warranty, orundertaking, expressed or implied, is given to the accuracy or completeness of such information by PT Asset Management, LLC or any other person. While such sources are believed to be reliable, PT Asset Management, LLC does not assume any responsibility for the accuracy or completeness of such information. PT Asset Management, LLC does not undertake any obligation to update the information contained herein as of any future date. This email is confidential, is intended only for the person to whom it has been directly provided and under no circumstances may a copy be shown, copied, transmitted or otherwise be given to any person other than the authorized recipient without the prior written consent of PT Asset Management, LLC. Any indices and other financial benchmarks shown are provided for illustrative purposes only, are unmanaged, reflect reinvestment of income and dividends and do not reflect the impact of advisory fees. Investors cannot invest directly in an index. Comparisons to indexes have limitations because indexes have volatility and other material characteristicsthat may differ from a particular hedge fund. For example, a hedge fund may typically hold substantially fewer securities than are contained in an index. Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use offorward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events, results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance or a representation as to the future.
© 2025 PT Asset Management,
