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Bond Ideas?


wescobrk
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I think you need to clearly define what you are looking for.

 

If you are looking for equity like returns by buying performing credit with some risk, I’d opine that the Fed took that away.

 

If you are looking for multibagger distressed opportunities, I’d opine that it’s tough to do so in that you’ll likely get primed by distressed debt funds and those who can invest in leveraged loans/new money/ etc.

 

If you are looking to invest in bonds as a source of duration risk and carry as a diversifier but have very low return expectations and can stomach volatility, then I think there are some things out there.

 

I posted on some Goldman Sachs backed munis that I like at $120/3.5%. They are now $140/2.2% and closer to fair value perhaps, but 2.2% triple tax free isn’t bad. Could see these tighten with tax rate increases perhaps.

 

https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/531127ac2-liberty-ny-dev-corprev-goldman-hq-05-25-10012035/msg411747/#msg411747

 

I still like my world class university debt ultra longs for their convexity and duration.

 

https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/going-looooooooong-with-world-class-university-debt/msg404545/#msg404545

 

 

 

 

 

 

 

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How about hedging a little by shorting 30 year bonds? Like that black swan guy who made 4000% every time people think they got it all under control )

Of course you have to have a hedging insurance mentality and find a suitable product. That's the catch.

 

I’d do the opposite and buy duration via the 30 year zero.

 

30 year zero’s are at $67-$68 and yield 1.2% offering 47% upside to zero yield (and more to a negative yield) If you think long rates should be at say 3% instead, they’d fall to $41 (-40%). That’s the beauty of convexity. -1.2% change in yield is more upside than the downside from +1.8%.

 

Japan is at 60 bps for 40y and Germany is negative at 30y.

 

Buying bonds to hedge japanofication/deflation Etc is much more attractive to me than shorting them to bet on “normalization”. Normalization means capital will return more and that’s not a risk I’m worried about. That short will potentially work against you while your stocks are going down. On the personal front, I'm also already short a boat load of bonds via my 95% LTV mortgage. if we get inflation / rate increases that kills the value of long term liabilities, that short will be great to have on. Deflation is much scarier.

 

If a normal Joe Shmoe has 30% in bond index at a 7 Or 8 duration, his whole portfolio has about 2 points of duration (30*.07).

 

Why not instead have 5-10% in ultra long duration and achieve similar or even higher durationas jo Schmoe with greater convexity? The reason to not do this is most would advise to diversify duration risk across the yield curve, so that you aren’t making a curve bet. I say phooey to that. Go long volatility and convexity with a barbell and buy super long duration (in small size) and don’t bother with the rest of the bond market.

 

If you want to make it even spicier, TLT call options or long 30y futures options would allow you to risk even less capital and get more duration /convexity

 

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Frankly I don't really think any bond investment is that great. short or long. I remember Buffett said in an interview he would love to be long Sp500 and short 30 year bond but he didn't know how. I see the problem. You can't really lock in an efficient bet on the bond part long-term. And he actually could do it with derivatives. Maybe he didn't find a counterparty. One could in theory buy an investment that provides income during disinflation and has a tail hedge against inflation - like hard asset component. Well this is of course the standard commodity, agriculture, real estate, energy playbook. Is there a reason to think bond ideas are going to outperform?

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Being long stressed, performing credit has been a great 2Q trade, although I'm not so certain it will be going forward as things have settled down and those credits still stressed are those with the most amount of hair on them / likely to actually restructure. Hard for retail investors to participate in these trades given minimum purchase size requirements, worse spreads vs. institutions, and you should be aware that as a retail investor you are knowingly putting yourself at a disadvantage in restructurings vs. institutions. Not a disadvantage in the sense you're not as smart, but a lot of restructuring plans will purposefully exclude / offer a worse deal to non-QIBs because institutions don't like the headache of dealing with retail holders in these situations so they prefer to clean them out of the structure.

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