Bonds!

[CorpRaider]

1 hour ago, Spekulatius said:

I added a bit TIPS (fund) in 401k yesterday. Also added some $LUV.

 I should probably sell my $SAVE and consolidate into $LUV.

[TwoCitiesCapital]

23 hours ago, tede02 said:

Added a little to my 10-year holdings and 5-year TIPS today. Keeping my purchases small. I'm gravitating toward a barbell approach with money market on one side and stuff that matures in 5-10 years on the other. But my barbell is much heavier on the money market side. I'm too chicken to make a big bet on duration. 

 

+1

 

I've got a small amount of fixed income left in money market. Most of it has been moved to short-term core plus type funds. I want spread, but not spread duration.  

 

My intermediate stuff is all treasuries/mortgages and a little IG via funds and is now where the bulk of my fixed income assets are. 

 

I have a handful of speculative positions in discount CEFs and ZROZ/TLT. Very small part of the portfolio, but growing . 

[thepupil]

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!

[Dinar]

51 minutes ago, thepupil said:

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!

Why don't you take a look at Transdigm bonds of 2029?  I think that they yield over 9% and I think that they are money good (I own the equity, and you got $46bn market cap)

[thepupil]

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 $. 

Edited October 19, 2023 by thepupil

[Spekulatius]

16 hours ago, thepupil said:

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 $. 

TDG may be great for equity investors, but is a lousy bet for bond investors with their leveraged cash out strategy. I would not touch it's bonds unless the yield is much jucier.

[thepupil]

57 minutes ago, Spekulatius said:

TDG may be great for equity investors, but is a lousy bet for bond investors with their leveraged cash out strategy. I would not touch it's bonds unless the yield is much jucier.

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. 

Edited October 20, 2023 by thepupil

[realassetsvalue]

What are potential issues that can arise from getting credit exposure through ETFs as opposed to owning the underlying directly?

 

For example, with the talk of TIPs above - what should a complete novice to the fixed income world be aware of if I would buy, say, the iShares TIPS Bond ETF (https://www.blackrock.com/us/individual/products/239467/ishares-tips-bond-etf) instead of actually buying TIPS?

[thepupil]

 

 

- 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. 

Edited October 20, 2023 by thepupil

[thepupil]

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. 

[realassetsvalue]

Your excitement and slow Friday is my gain! Thank you for the detailed response.

[thepupil]

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 

[tede02]

3 hours ago, thepupil said:

 

 

- 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 

 

 

 

This is a really good point that I think is not well understood. There's probalby few people worried about deflation but the risk (of declining principal on TIPS) does exist for some of the older issues that have all the built-in inflation. I've been thinking about this because some of the issues I've bought are way above par. We could get deflation in a hard landing but I'd bet it wouldn't last given the pattern of fiscal and monetary responses to crises since 2008. 

 

The other basic thing I like about owning individual bonds, particulary longer duration, is you always have option to just hold to maturity if rates move up and you're sitting on capital losses. Pupil alluded to this in one of his points, but there is no maturity on a fund so there's more risk of principal loss. There are a lot of bond funds that are down well into the double digits over the last 18 months. Not much investors in those funds can do except hope rates decline. 

[thepupil]

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
 

Edited October 20, 2023 by thepupil

[TwoCitiesCapital]

On the flip side, the benefits to owning funds are daily liquidity (not a guarantee for individual bonds - especially when getting outside of things like treasuries). 

 

Other benefit is fills at, or near, NAV. I'm sure treasuries are more liquid, but moving outside of those to munis, TIPS, mortgages, IG etc then you really have to start sizing up buys to 50-100k type lots OR you tend to get really wide bid/asks that eat 1-2% of your return before considering commissions. 

[tede02]

Yield on the 10-year plunged before I could grab a few over 5%. Damnit Ackman! LOL. 

[Gregmal]

Are these levels psychological or something? What’s the big deal between 4.80 and 5.01?

[tede02]

33 minutes ago, Gregmal said:

Are these levels psychological or something? What’s the big deal between 4.80 and 5.01?

 

Yes! 

[ValueArb]

1 hour ago, tede02 said:

Yield on the 10-year plunged before I could grab a few over 5%. Damnit Ackman! LOL. 

 

The last 60 years the ten year treasury has an average yield of 5.9%. Given the massive increase in federal debt and deficits we are running, I'm looking for at least 8% in the next five years.

[gfp]

On 10/11/2023 at 9:14 AM, gfp said:

I think there is a lot of demand across the curve for treasury securities with a 5 handle.  This year's bond market (and maybe the stock market as well) is shaping up to rhyme with 2018.

 

It will be interesting to see if anything on the UST curve from 2's out to 30's can close today with a 5 handle...  As I posted above, the seasonal pattern is playing out just like 2018.  Big September-effect yield fake out.  There is a lot of demand for US government securities at 5%.

[gfp]

1 hour ago, gfp said:

 

It will be interesting to see if anything on the UST curve from 2's out to 30's can close today with a 5 handle...  As I posted above, the seasonal pattern is playing out just like 2018.  Big September-effect yield fake out.  There is a lot of demand for US government securities at 5%.

 

Close to a sweep, but that pesky 2 year held on to the 5 handle...

[tede02]

On 10/23/2023 at 12:46 PM, ValueArb said:

 

The last 60 years the ten year treasury has an average yield of 5.9%. Given the massive increase in federal debt and deficits we are running, I'm looking for at least 8% in the next five years.

 

Rates definitely could go higher. But one thing I found interesting was something one of the PGIM fixed income guys told me. If you look at a 100+ year chart of the 10-year, the only time it was significantly above 6-7% was in the 80s during the Volker years. Outside of that period, long rates have overwhelming been under 6% over the past 150 years. 

 

That said, I don't personally have strong conviction either way. As rates have jumped and broken through their highs this year, I've just opportunistically grabbed some small dollar stuff. If long-rates fall 100-200 bps, I'll earn a nice capital gain. If they go higher, I'll just collect my coupon and keep buying. 

 

 

 

 

Edited October 26, 2023 by tede02

[mattee2264]

Worth factoring into that assessment that for much of the early period the world was on a Gold Standard which was pretty effective in keeping inflation low and allowing for lower rates. 2nd half of the 20th century 5% was the bottom of the range rather than the average. 21st century it was the top of the range but that reflects that in the 21st century monetary policy has been pretty irresponsible. 

 

Who knows what the future holds. Some argue for higher structural inflation driven by food and other resource shortages, de-globalisation etc. Others argue that technology will continue to have deflationary impacts as will slower growth necessitated by pursuit of net zero targets and the deflationary impact of massive amounts of debt. 

Edited October 27, 2023 by mattee2264

[james22]

Extended duration tonight, swapped Short-Term Treasuries to Intermediate.

 

 

Edited October 28, 2023 by james22

[dealraker]

 

What is the chance, the probability, that debt default threats/concerns hit our treasury market sales and pricing in such a manner that all living hell breaks loose?    And what happens if that comes?

Edited October 31, 2023 by dealraker