thepupil

some news from "Rich Men North of Richmond" land. House 1 is 2200 sq feet, 4BR lot w/ old shitty house on it bought for $1.1mm in 2022. Builder planned to get variance to slap a Mcmansion on it. Didn't succeed (#NIMBYISM). Opts to do gut reno on the small house. Looks beautiful, fancy AF, but small for px . Throws it on the market for a whopping $1.7 million. Sitting without any action for weeks. House 2 is 1900 sq feet. 3BR. Nice old European lady who loves my dog has to go to the nursing home . my neighbor realtor works with her for a month to make the house updated/clean, but nothing flashy. Throws in on market for $995K vs $1.2mm zestimat estimate. Flies off the shelf w/i 2 days, undoubtedly well above ask (don't know price), likely close to zestimate. these basically encapsulate what I'm seeing. the $2mm houses where someone's jumping from a $5K to $15K payment are moving slower than mollasses in winter. the more attainable there's near infinite demand and no supply.

https://institutional.vanguard.com/insights-and-research/perspective/rising-rates-beg-the-question-bonds-or-bond-funds.html vanguard answers this well in my view. Bond funds maintain a constant risk profile. bonds held to maturity dont magically avoid losses.that whole point is kind of a mental game. But it’s true that you can get more precise with initial risk profile with individual bonds. the more I’ve done it in practice though, the more I like funds/ETFs

Also the indices are cap weighted which means in corporate IG land you might end up lending to more banks than you want to, in bond index land you’re basically only in tsy’s and mtg’s with no credit. Starting the obvious, but it pays to look under hood for 10 mins to make sure you’re getting what you want

i realize a super quick and long response, caught me at end of my day on a slower friday and bonds are just so exciting right now.

- ETF's maintain a maturity profile in line with the index rather than roll down to maturity which is what buying an individual bond would do. this can matter. If one wanted to offset a liability that's due in 2048, he/she might buy a 2048 maturing bond/TIP. In 5-10 years that individual bond/TIP will be the right duration for that liability, but if one bought an index that starts out at the right duration, the liability will get shorter while the index ETF maintain its duration. in actual practice, I don't think this matters much but it has implications i haven't FULLY thought through - ETF's price discovery and liqudiity is a function of supply and demand of the listed equity and the interplay between the market makers that create/redeem them / bonds price discovery and liqudiity is a function of the market makers of those bonds. in practice, in 98% of times, this won't matter, but I'm sure it could. - bond bid / ask even on treasuries kind of sucks. I probably ate a point or 2 in two months on my recent individual bond buying / selling spree. I'm perfectly fine doing that sloshing my book around in the greatest bond sell-off, but I don't want to do that once every eyar for the next 20. ETF's and mutual funds offer a diversifed portfolio w one click / low t-costs. this matters more where diversity actually matter.s if buying TIPS / treasuries you don't need to be diversified by issuer...it's all the same issuer. but if you want to diversify by maturity, even tsy's are kind of annoying, like do you want to buy 30 line items? - benefit of buying individual TIPS is you can target how seasoned / new you want the TIP to be. I like some of the old TIPS that were issued in '20 / '21 because they've declines so much in price, they can't lost money in deflation. the 0 1/8% of 2051 at $52 returns 1.8% nominal to maturity at huge deflation because you're guaranteed at least original principal. At 4% deflation it returns 6.5%. So that's a an instrument that literally can not lose money and is guaranteed to grow purchasing power by 2.5% /yr and if real rates fall can make 20-30-50-100%. EDIT Actually, you can't lose money in inflation if you buy a new TIP. the problem with buying a seasoned TIP that has lots of inflation built in but is still above original par value is you can lose money in deflation...but for new tips and extremely discounted ones it doesn't matter and most of the universe is either new or very discounted so maybe it really doesn't matter. maybe buying new actually better since principal won't adjust below....bottom line buying individual bonds let's you get into this degree of pointless minutiae i do both. i like ETFs. i go individual when I just can't get something in ETF form. Like there's a few illiquid college perpetuals that i love that I just slowly buy. I own some Cal Techs and Bowdoins right now. my parents own some stanford muni's. I have tried to buy Disney and Coke far aout paper but it's too illiquid. i wish there was a CEF that owned every high quality 100 year bond, but alas.

agreed, not gonna lend to a creditor unfriendly sponsor for 200 bps more than IG, particularly with low duration upside. if i want to lend to creditor unfriendly sponsors with low duration / upside, I'll buy CLO AAA and be structurally superior / diversified.

TDG 4 7/8% of '29 are at 350 over / 8.22% all-in. It's a high quality, cusp of IG/HY name. At this time sticking to IG, lower spread w/ more duration. if credit spreads widen, I'd be more interested in something like this. its 350 whn HY is 520. If HY got to 800 and htis was say $75 / 650 / 11%, I'd be more interested. it only has duration of 4. I've never been comfy with it as a business, I've followed it for a decade or so and watched it make people lots of $.

I sold almost all my individual 20 ish year individual corporate bonds today, having lost 5-10% in a relatively short time frame seemed like a liquid day with very tight bid/ask. I plowed all proceeds and more into VCLT w/ some $55 tail hedge puts. this move generated some tax losses, freed up lots of margin, and replaced that which i sold w/ diversified equivalent. eventually, I'll migrate these to tax free accounts but in the accumulation phase it's just easier to buy in taxable, short term returns dominated by price change whcih thus far is negative/loss generative. Long term Corporate Index: $76, 4.45% coupon, 22 yr wgt avg maturity, duration of 12, yield of 6.5%. I'm happy to be early to taking duration risk and am happy to lose money all the way down. Let's go!

I refuse to believe 5% / 2.5% real really can be the new normal. Doesn’t work with how indebted we are. Either need same nominal rates with higher inflation /lower rates rates, or lower nominal rates. Otherwise Interest as % of GDP/budget will force dramatic and undesirable societal change. basically my macro view is: lower rates or hell is coming. I’m an optimist so i’m more positioned for lower rates than hell. Even if hell is coming (massive taxation increase people say “we used to have 15% rates”…well we also used to have 30% debt to GDP. Can someone point me to errors in this “logic”/hope?

@TwoCitiesCapital, how do you square this view with the Fed data showing the largest ever REAL increase in HH net worth from 2019 to 20222, the largest percentage gains being from the young/levered. Do you think that's reversed in the 10 mo's since? Do you think it's "all housing"? Do you think something wrong w/ the data?

twitter and front page bloomberg today

All investments are a DCF of some kind. Whether or not one builds detailed models called DCFs will vary.

I don't think we'll see that kind of relative performance out of LT tips. At peak equity valuations in 1/2000 TIPs offered 1% more than SPX's earnings yield. stocks were more expensive then then they were today. then stocks collapesed in GFC and bonds went to negative real yields. I think today is much less extreme. but 2.5% risk free real in context of a highly highly indebted society, is attractive and unsustainable IMO.

TIPS were a very new asset class in the late 90's and were, with hindsight, a spectacular buy. In 2000 there were only like $75 billion of TIPS. There are now $2T. They were about 1% of tsy market then. Now they're 6%. For these, and a host of other reasons, I don' think we'll see 4% real on TIPS again. I may be wrong. in the early 90's TIPS were <2% of a much smaller treasury market. They are now 6%. from when they were 4% real TIPS OP'd stocks for the next 20 years.

yes, I'm not a big "follow the CPI" guy but this one seems particularly dumb.

I'm not wealthy enough for PPLI. I think these guys are the leader, but I'm way out of my depth. This is for $100mm+ types, not little old me.https://www.lombardinternational.com/en-US Owned by a Blackstone fund...of course. I've just heard that's the way wealthy individuals invest in tax inefficient strategies (but you obviously pay fees and give up fulla ccess to your $$$ it's for people who are ensuring their grandchildren's grandchildren will be wealthy). I agree. I'm all IG/tsy/MBS for now. I don't think risky credit spreads are that interesting. CDX HY spreads are about 90 bps wide of avg since 2012. I don't think that compensates one enough for what will likely be higher default/low recovery environment than last 10 years. I'm comfy adding a little spread via IG/MBS/etc just to make the returns more "equity like", at the risk of underperformance to tsy's ina big drawdown.

2011. real and nominal yields are drastically higher and ERP's much lower today than in any time of my career (which is short and does not at all comprise the numerous scenarios both backward looking and forward which might occur). from my college graduation to present the 10 yr TIP has yielded 500 bps less (on average) in real yield than SPX, for the first few years that number was 800 bps. That's now 238 bps (2.3% real 10 yr TIP, 4.66% nominal earnings yield, SPX) Using nominal 10 yr tsy's, the average has been -300 bps, with the first few years** (2011/2012) being -600 bps. Now its 5 bps (10 yr yield and SPX earnings yields are the same). I'd therefore say that on a simplistic yield comparison using broad liquid indices, that bonds are more attractive than they have been over last 12 or so years (post GFC era). of course there are individual securities of both types that will be better/worse than anything over this time frame (your greek bonds being a nice example). ** I remember lots of Jim Grant (and Jeremy Grantham)** articles from the 2011/2012 time frame talking about buying blue chip high quality widow and orphan stocks for like 11-14x earnings (think WMT, JNJ, LMT, GOOG even, MSFT even, UNH, etc). Back then it was very clear to me as a 20 something to be all stocks. and you got paid handsomely for it. I use those folks because they are often painted as permabears. even with there bearish value oriented bias, they couls see risk/reward much better in stocks. I think the picture is far more murky today.

I don’t think he’s marketing to wealthy individuals, but rather (mostly) non tax paying institutions. non wealthy to moderately wealthy people have 401ks/IRAs/annuities etc. very wealthy people have private placement life insurance that remove the tax friction. regarding defaults, agree completely the common practice of quoting gross yields in risky credit is somewhat misleading, but I’m not sure of a good alternative because everyone will have dofferent default rates/LGD. I agree that 6-8% pre-tax is more or less what’s on offer at this time, most safe stuff I’ve seen being closer to 6 on the long end and 7 on the short end. Extreme safety being ~1% lower then going up from there with credit risk. pre-tax seems pretty competitive with stocks, when get at computer, I’ll run what % of 5 year rolling periods >7% for stocks, my guess would be like 60%-80% or so but not sure. If you’re starting from “with no knowledge, strictly backward looking, this has 30% chance to beat stocks” and overlaying a little bit of bearishness/caution/relative value judgement, think it’d make sense to own some bonds (and would be dumb to own all bonds /no stocks). it at least makes more sense now than any time in my short time as an investor.

rabbit hole #2 of the evening, so the largest security held by this fund is FNMA STACR 2022 DNA2 M2RB (quite a mouthful!). I don't begin to fully understand them. Because I don't have a PhD in financial engineering. From a high level, they are interest only, pay a floating rate and you really don't want Fannie Mae experiencing >125 bps of losses on their mortgage portfolio, >200 bps over the 5 yrs from issuance and you lose all your principal. I kind of love it, put 1% in it, get paid 10% just to bet on disaster not happening. but you're writing a put on the american household. biggest risk would seem to be short term rates decline along with spike in defaults (deep recession).

this is a fun chart. 80-145 bps thick tranches. HUGE structural leverage (but you got burn through everyone's substantial home equity before dime of losses) https://capitalmarkets.fanniemae.com/media/22751/display

I don't know too much about CRT's, my relatively uninformed impression is they are a very levered bet on housing prices and health of consumer and not really in line w/ your cautious macro view. .you're basically betting there won't be any defaults on agency MBS. check out the coupons on the largest holdings. very high. https://capitalmarkets.freddiemac.com/crt/securities https://capitalmarkets.fanniemae.com/credit-risk-transfer/single-family-credit-risk-transfer/connecticut-avenue-securities

howard marks mostly selling credit and private credit that will have relatively short duration or in case of private credit, direct lending, leveraged loans, etc, all that’s floating rate. but even if we’re talking fixed rate credit, duration of the High yield index is quite low at about 4. Most HY bonds mature in 5-7 years and at 9%+ YTM on index not very rate sensitive. Credit bonds/loans etc have far less duration than equities. You can obviously get more duration in tsy’s/IG/mtg’s etc I don’t think credit spreads for risky stuff are all that great; IG spreads are pretty average/myeh (but I think all in yields on IG/MBS meet my hurdle).

ZROZ options are pretty illiquid. I recommend just buying 30 year futures options CBOT via IBKR, pretty easy once you get hang.

kind of my point. if the aggregates (real and nominal) have seen very good trailing 3-5 year growth and the top 20% of companies and people who drive the income, asset ownership and spending all have inflated NW's from ZIRP era can now invest their NW's (just a hair off peak values) at positive REAL interest rates, it feel to me that rising rates doesn't do much until it really really breaks something. feels like stimmy as much as highly negative rates felt like stimmy, just with a different course of action.. and the to date damage is just kind of myeh little flesh wounds or niches blwoing up (like a bank with 10 venture firms as its entire deposit base, or some value add sunbelt multifamily floating rate folks or whatever). the bottom 50% were and are poor. no change. until the tax man or social upheaval man ruins the party,

I don't think its about impressive friends so much as where folks are in life. Mostly friends with HENRY's who bought their homes in 2018-2020. I mean my own home equity has gone from $30K ish to $600K ish ($200K starting if I asusme 20% equity instead of 2%). If I only had that and not much savings/stocks (like lots of americans), it'd be 3x, and i live in a lagging housing market, a covid loser. If I look at one of the first results for "household nw adjusted for inflation" I get this September 2023 article that shows the metric to be pretty much at all time high, just a hair off peak and above trend. like if housholds have 98% of peak NW but can now earn 2.5% real risk free, I struggle to conclude that they are worse off, collectively, on income side unemployment is 3.8%, about best its ever been... https://www.advisorperspectives.com/dshort/updates/2023/09/08/household-net-worth-q2-2023 again, I expect things to get worse, but it seems like everything is prety awesome right now and virtually no damage has occurred. along with just seeing much better than previously relative value in fixed income, it's why i'm more defensively positioned than in past, because it's just been so damn good. feels like housing prices should come down, maybe stocks should go down, but they haven't really overall (as measured by cap weighted indices).