thepupil Posted March 27, 2020 Share Posted March 27, 2020 There was recently a VIC writeup about dislocations in the muni bonds issued by the likes of Harvard, Princeton, Stanford, MIT, etc. It mostly focused on front end muni paper, making a nice tax free 2 or 3% annualized for a few months as there was a liquidity squeeze in all parts of the bond market. I am looking at this a bit differently and am more focused on the exceedingly long duration taxable corporate debt, quasi-perpetuals issued by these institutions as a convex Japanification/deflation hedge/juicy portion of my parents bond portfolio. there is also a short to intermediate term spread tightening trade once liquidity and normalization return to the bond market. As an example. The taxable MASSIN 3.885% of 2116 (you read that maturity correctly), are offered at $116/3.33%, approximately 200 bps of credit/liquidity vs the 30 year to lend to MIT which has a) a top-performing endowment b) large property holdings c) diversified source of revenue (tuition, grants, summer camps, etc). It deserves its AAA credit, unlike say, Exxon Mobil whos 2050 paper offers the same yield. I don't really think this is anyone's bag here, but I think this is actually decent risk/reward as part of an overall portfolio and a good way to safely (from a credit perspective) add duration at a substantial pick-up to a zero coupon or 30 year tsy bond. 200 bps is a good liquidity/credit risk pickup for quasi-soveriegn paper. If you want to get really fancy you could short 30 year futures against it and just be long the spread and make a nice return on tightening. If I knew where the 30 year would be in 6 months, I would be sending this from my $10 million bugout compound. I don't. It could be at 3% and these could continue to trade 200 over (that would be bad), it could be at 3% and these trade 30 over (and you'd be flat) or it could be right where it is and these trade 50 over (lots of profit). In this environment expect huge bid/asks tons of mark to market vol, but again once dealers are back at their desks, this stuff should tighten substantially. Responses ahead of time: 1) what about inflation? that's not what this part of the portfolio is meant to protect against. inflation will destroy this. period. 2) don't you want the bonds part of the portfolio to be super liquid so you can use them for rebalancing? yes, and this isn't, you can't have this be all your bond portfolio 3) will fidelity/SChwab/ IBKR screw me on the bid ask? yes, as will any dealer. i suggest using IBKR to get a good idea of where actual bid/ask is. Fidelity is terrible and will trade against you or just not offer you the bond 4) I think lending at 3% for 100 years is insane..I agree, but so is lending at 1.3% for 30 years. Positive yielding dollar duration with virtually no credit risk is a scarce asset. It may not always be, rates can normalize. if you want to hedge duration you can, but that's a different trade with a new set of risks (you could lose money as sovereign trends to zero and credit spreads blow out) Link to comment Share on other sites More sharing options...
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