Bonds!

[Dinar]

2 hours ago, TwoCitiesCapital said:

 

So despite NOT doing a lot of things, he still managed to run the largest peace time deficits and failed to solve the "border crisis" with his wall? 

 

Glad we're on the same page here. 

 

 

I have plenty to show for plenty of my fixed income positions. The only ones doing poorly are the TLT/ZROZ duration plays that admittedly won't do much until the Fed cuts. 

 

The emerging markets funds I've owned have done ~10%/annum over the last 2-years. 

The CEFs had double digit returns in 6 months before I closed them out. 

My levered mortage exposure in mREITS is up mid-teens from a year ago. 

 

Sure - not the same returns as the SPY, but hella-good annualized returns w/o falling rates and the difference is you'll keep most of it in a recession scenario. Can't necessarily say that about the S&P or any stocks. 

Deficit is much bigger now than it was under Trump, not that Trump should have run it.  Compare illegal immigration under Trump vs today, night and day.

Congratulations on 10% return on an emerging markets debt instruments, not an option for me - 52%+ tax bracket in NYC. 

Being from an emerging market myself, I would never buy the debt from these places, unless I was being paid inflation +10-15% for long-term paper.  Brazil, Mexico & India/Vietnam/Czech Republic/Hungary being possible exceptions.

Glad to hear that mReits worked out for you, would not a levered position in Treasury zeroes or TIPS done much better?

I did distressed debt for years, so no desire to take interest rate risk - not my skill set.

[TwoCitiesCapital]

18 hours ago, Dinar said:

Deficit is much bigger now than it was under Trump, not that Trump should have run it.  Compare illegal immigration under Trump vs today, night and day.

Congratulations on 10% return on an emerging markets debt instruments, not an option for me - 52%+ tax bracket in NYC. 

Being from an emerging market myself, I would never buy the debt from these places, unless I was being paid inflation +10-15% for long-term paper.  Brazil, Mexico & India/Vietnam/Czech Republic/Hungary being possible exceptions.

Glad to hear that mReits worked out for you, would not a levered position in Treasury zeroes or TIPS done much better?

I did distressed debt for years, so no desire to take interest rate risk - not my skill set.

 

Perhaps - but I've got to work with what I've got and nobody is giving me leverage in my IRAs/401ks/etc where the vast bulk of my investable assets are.  This is why I have to get it via the investments themselves like mREITS, discount CEFs, and the PIMCO/RAE Plus funds. They get better rates on the financing than I would too. 

 

My taxable accounts are currently nearly 100% Bitcoin and will remain that way for the foreseeable future and I don't really want to have that as collateral for my leverage so I do what I can elsewhere. 

[TwoCitiesCapital]

While everyone is on about the relative performance of bonds after a strong 2023-2024 (and 2022 all but forgotten), I'd like to remind the board that there are plenty of blue chips not keeping up.

 

All of the below are in the top 100 of the S&P 500 currently (after such terrible performance) which implies many other companies in the index did the same/worse. It's also not exhaustive - it doesn't include everyone that is flat to down in that top 100 list - just the ones that were obvious to me as I was scrolling down the list of tickers. 

 

Performance figures and the ATH reference are eyeballed form the chart and not intended to be accurate to the date/decimal. 

 

UPS: down ~45% since ATH early 2022

Disney: down ~53% since ATH early 2021

Tyson: down ~40% from ATH early 2022

J&J: down ~15% from ATH range mid 2021

Home Depot: down ~15% from ATH early 2022

Accenture: down ~20% from ATH late 2021

Danaher: down ~10% from ATH in late 2021

Honeywell: down ~7% from ATH mid 2021

Medtronic: down ~40% from ATH mid 2021

Schwab: down ~30% from ATH late 2021

Nike:  down ~60% from ATH in late 2021

 

Proctor & Gamble: ~flat to ATH in early 2022

United Health : ~flat to ATH in early 2022

Texas Instruments: ~flat to ATH in late 2021

ADP: ~flat to ATH range in 2022

 

These are nominal price returns that don't include dividends OR the impact of inflation over the last ~3 years which would make the calculations look way worse. 

 

This is what I mean when I say stocks are not an inflation hedge and that I'd rather own bonds when the tide is obviously moving against me.

 

If you didn't own the most expensive stocks blue chips of 2021 (the mag-7 and a handful of others), your performance looks more akin to this. 

 

I don't trust my ability to concentrate into 10 names that will do well while the remainder of the index does horribly. The stocks I've picked have worked well for the last 3 years, but there was the chance that they wouldn't have just like all of the above. Bonds give you the certainty of return and that you get to keep it. Stocks? Obviously not so much. 

Edited July 23 by TwoCitiesCapital

[thepupil]

not sure I agree. since the beginning of 2023, bonds have been worse than t-bills, Equal Wgt S&P500, ACWI ex United States, EM stocks, Gold. it's not just a Mag7 thing.

 

I've been building bonds all the way over that time period. The bond index is now my single biggest line item (but still only like 9% of my nut), but let's not pretend that bonds have done well or added any benefit to relative to other asset classes thus far. 

 

so far it's been wrong to have any. may be different going forward. only been a couple of years with +real rates. 

 

Edited July 23 by thepupil

[TwoCitiesCapital]

2 minutes ago, thepupil said:

not sure I agree. since the beginning of 2023, bonds have been worse than t-bills, Equal Wgt S&P500, ACWI ex United States, EM stocks, Gold. 

 

I've been building bonds all the way over that time period. The bond index is now my single biggest line item (but still only like 9% of my nut), but let's not pretend that bonds have done well or added any benefit to relative to other asset classes thus far. 

 

so far it's been wrong to have any. may be different going forward. only been a couple of years with +real rates. 

 

 

I say bonds generally for all fixed income. 

 

In late 2021 I was buying t-bills and iBonds which I owned for much of 2022. 2023 is when I started adding spread and duration once you were getting paid for it. I've been increasing spread/duration all through 2024 as well. 

 

To further illustrate - S&P equal weight is barely positive over that period nominally and definitely negative on inflation adjusted terms despite having 3-years to catch back up with revenues and profits. 

Edited July 23 by TwoCitiesCapital

[thepupil]

if we include 2022, indeed  S&P 500 equal weight is < t-bills at 3% ish, SPY at  almost 8%/yr, 3% ish for stocks outside US. EM and bonds are negative. Gold a nice 11%/yr. so yea, I agree with you over that time frame that non mag7 stocks not really worth owning vs t-bills (with the benefit of hindsight). 

Edited July 23 by thepupil

[TwoCitiesCapital]

1 hour ago, thepupil said:

if we include 2022, indeed  S&P 500 equal weight is < t-bills at 3% ish, SPY at  almost 8%/yr, 3% ish for stocks outside US. EM and bonds are negative. Gold a nice 11%/yr. so yea, I agree with you over that time frame that non mag7 stocks not really worth owning vs t-bills (with the benefit of hindsight). 

 

I would argue that it was the benefit of foresight informed by history. 

 

I made the case for Gold/varying fixed income over general equities at that time and since. 

 

My equity allocations have overall done better than this (and better than fixed income), but there was no guarantee they would/will continue which is why I'm not all in on them and am trimming gains as they happen. 

 

The thesis was that equities, generally, are not the place to be during volatile and/or rising inflation. That is playing out right before our eyes even outside of a recession and even with the index as a whole near it's highs. It's not like we're cherry picking  timelines unfavorable to equities.

 

On average they've underperformed t-bills over the last 3 years. I expect a reasonably good probability they may underperform intermediate bonds over the next 2-3 years. Especially if we finally get that recession leading indicators have been screaming about for ~2 years. 

 

And gold will likely crush equities over the course of the whole decade. Its happening now right before our eyes. Just like it has in prior inflationary shocks. 

[Gregmal]

Speak for yourselves. The 2066 Pupilbonds I own(the only bonds I really own) have smashed it. Something like 78 to 98 with a 9% coupon. 

[thepupil]

6 minutes ago, Gregmal said:

Speak for yourselves. The 2066 Pupilbonds I own(the only bonds I really own) have smashed it. Something like 78 to 98 with a 9% coupon. 

haha, those were some good bonds...FWIW I'd probably leave the last two points to someone else. 

[thepupil]

17 minutes ago, TwoCitiesCapital said:

 

 

The thesis was that equities, generally, are not the place to be during volatile and/or rising inflation. That is playing out right before our eyes even outside of a recession and even with the index as a whole near it's highs. It's not like we're cherry picking  timelines unfavorable to equities.

 

On average they've underperformed t-bills over the last 3 years. I expect a reasonably good probability they may underperform intermediate bonds over the next 2-3 years. Especially if we finally get that recession leading indicators have been screaming about for ~2 years. 

 

And gold will likely crush equities over the course of the whole decade. Its happening now right before our eyes. Just like it has in prior inflationary shocks. 

I agree w/ this, but I'll always be at least like  80% equities because can't time the re-entry. 

 

curious if you think we're still in a time of "volatile and/or rising inflation?"

[TwoCitiesCapital]

20 minutes ago, thepupil said:

I agree w/ this, but I'll always be at least like  80% equities because can't time the re-entry. 

 

curious if you think we're still in a time of "volatile and/or rising inflation?"

 

I think that neither party is serious about being fiscally conservative and that we're finally getting to the point where interest on the debt is untenable and only going to be payable via issuing more debt/printing money. It's already the second largest budget item with the first being social security (also indexed to inflation/interest rates).

 

I DO think inflation is going to be incredibly volatile going forward, but I do NOT have conviction in trying to guess a specific level of average inflation over the decade other than saying it'll likely be higher than 0-4% which is the sweet spot for equities the last 20 years. 

 

I think gold, BTC, and other real assets will be the winners over the course of the decade, but they'll be incredibly volatile around the business cycle which is why I also like fixed income here in the near term. At some point, even that may become untenable at times pending what average inflation levels come out to - but am comfortable owning it now at 4-7% rates with where the trajectory on near term inflation is. 

 

Buying equities on dips (requiring  selling on rips to have liquidity) will likely work even better than gold/short term fixed income/etc. But I remain unconvinced of buy/hold in this environment. 

 

I'm at ~65/35 today - up from 50/50 back in 2021/2022ish. Partly due to appreciation of equities and partly due to adding beaten down names in recent months like Alibaba and Prosus. I think 65/35 is probably the highest I want to be to equities though in the event my luck runs out and the sentiment on the names I own starts to turn for the worst. 

Edited July 23 by TwoCitiesCapital

[HubbadaPow]

A friend at Morgan Stanley told me yesterday that markets are forecasting 99% odds of lower interest rates.  Is anyone here locking in some sweet 4-5% yield?

[Gregmal]

Nah. Locking in 5% is like being offered free tickets to sit anywhere at The Garden for a Knicks game and asking to sit in the 400s. 

[TwoCitiesCapital]

2 hours ago, HubbadaPow said:

A friend at Morgan Stanley told me yesterday that markets are forecasting 99% odds of lower interest rates.  Is anyone here locking in some sweet 4-5% yield?

 

Have been for a bit. Finally get some price movement on my fixed income and not just the coupons. 

 

Though would add that the best time to have been buying was BEFORE the odds agreed with the positioning. 

 

Also, keep in mind the September effect, that has seen yields rise by 0.25 - 0.75% in September/October each year for the last few years. You might get a better bite at the apple in October even if the Fed does cut in September. 

[thepupil]

2 hours ago, HubbadaPow said:

A friend at Morgan Stanley told me yesterday that markets are forecasting 99% odds of lower interest rates.  Is anyone here locking in some sweet 4-5% yield?

 

I, for one, am continuing to do what I did at start of thread. every $1 into my 401k goes into bond index.

 

since 4/2022 the bond index has made 0.5%/yr while t-bills have made 4.1%/yr but starting from $0, $xK/month into bonds over that time period generates a +5.5% IRR and t-bills a +5.1% IRR. this is because bonds lost a fair bit of money relative to bills as yields rose and have started to come down, so the dollars invested when bonds yielded as high as 5.5% are now experiencing (small) capital gains as yields come down to the mid 4's. this is the appeal of bonds, it's damn near impossible to lose nominal money starting from a small amount and adding to them with flows and reinvestment of coupon. I was wrong on timing and started early in accumulating bonds, but have started to edge bills because of flows at higher yields and re-investment of coupon, even though bills still yield more than bonds (and have throughout this time)

 

having something in toolkit that you know will make 4-5% on a 5-7 yr time horizon is nice. I just view it as slowly buying back my mortgage (technically buying everyone else's mortgage given MBS are big component of the AGG). none of it's very material but feeling slightly less stupid.

 

of course, US stocks have tonned it, so should have just put it all in US stocks. the benefits from DCA'ing in more volatile stocks would be even more pronounced. 

 

[Dinar]

I hate to bring politics into this, but since it impacts economy, here it is.  Take a look at the economic and political program of VP Harris and what Governor Walz says and did in Minnesota.  If they get elected and get to implement their program, I would bet on inflation considerable in excess of 5% per annum and much higher budget deficits than what we have today.  I would not want to own bonds in that environment.  To be clear, President Trump is not a paragon of fiscal virtue, but he seems to be compared to VP Harris and Governor Walz.

[HubbadaPow]

1 hour ago, thepupil said:

 

I, for one, am continuing to do what I did at start of thread. every $1 into my 401k goes into bond index.

 

since 4/2022 the bond index has made 0.5%/yr while t-bills have made 4.1%/yr but starting from $0, $xK/month into bonds over that time period generates a +5.5% IRR and t-bills a +5.1% IRR. this is because bonds lost a fair bit of money relative to bills as yields rose and have started to come down, so the dollars invested when bonds yielded as high as 5.5% are now experiencing (small) capital gains as yields come down to the mid 4's. this is the appeal of bonds, it's damn near impossible to lose nominal money starting from a small amount and adding to them with flows and reinvestment of coupon. I was wrong on timing and started early in accumulating bonds, but have started to edge bills because of flows at higher yields and re-investment of coupon, even though bills still yield more than bonds (and have throughout this time)

 

having something in toolkit that you know will make 4-5% on a 5-7 yr time horizon is nice. I just view it as slowly buying back my mortgage (technically buying everyone else's mortgage given MBS are big component of the AGG). none of it's very material but feeling slightly less stupid.

 

of course, US stocks have tonned it, so should have just put it all in US stocks. the benefits from DCA'ing in more volatile stocks would be even more pronounced. 

 

Thanks for the feedback.  I've been carrying a ~20% position in tbills for a couple of years since selling some properties and it's been a painless way to wait.  I own individual bonds so I can avoid the worst tax treatment and also occasionally harvest some losses, but I'm just trying to earn some safe income and avoid risk with this portion of my assets.  I expect I will always have SOME bonds in the mix.

[HubbadaPow]

40 minutes ago, Dinar said:

I hate to bring politics into this, but since it impacts economy, here it is.  Take a look at the economic and political program of VP Harris and what Governor Walz says and did in Minnesota.  If they get elected and get to implement their program, I would bet on inflation considerable in excess of 5% per annum and much higher budget deficits than what we have today.  I would not want to own bonds in that environment.  To be clear, President Trump is not a paragon of fiscal virtue, but he seems to be compared to VP Harris and Governor Walz.

Yes...unfortunately politics matter a lot.  I remember running up to the 2020 election talking to a state pension manager and I asked him what he's looking at.  He told me the most valuable thing he could know was who would be the next president.  He was terrified of a Bernie, Harris, Biden result.  In hindsight, I'm impressed with how resilient the global economy has been, but risks abound.

[fareastwarriors]

 

49 minutes ago, HubbadaPow said:

state pension manager

Tell his state legislature and governor to fund their liabilities and/or reduce COLAs... 

 

Also spend less on investment consultants and paying all crazy fees for alt investments.

 

(I kid, kid. But when I was working at investment management company, we pitched a lot to these state and local pension funds. The stuff they invest in, the amount of fancy consultants used, and their poor returns... smh 

)

 

 

Reminded of me this old story from WSJ

 

What Does Nevada’s $35 Billion Fund Manager Do All Day? Nothing Nevada goes passive to beat peers; BLT or tuna

Edited August 21 by fareastwarriors

[Red Lion]

On 7/23/2024 at 8:13 AM, TwoCitiesCapital said:

If you didn't own the most expensive stocks blue chips of 2021 (the mag-7 and a handful of others), your performance looks more akin to this. 

 

Ive been seeing this position for several years now, but it seems like there's a ton of companies that have performed great, but they just don't necessarily fit into the same mold. For example APO and KKR have done great, and APO still isn't even part of the S&P500. These are just two that I've followed, but there are plenty of others on these boards that have had great success with companies that don't really make a significant contribution to the index (like FFH and JOE).

[rohitc99]

3 hours ago, thepupil said:

 

I, for one, am continuing to do what I did at start of thread. every $1 into my 401k goes into bond index.

 

since 4/2022 the bond index has made 0.5%/yr while t-bills have made 4.1%/yr but starting from $0, $xK/month into bonds over that time period generates a +5.5% IRR and t-bills a +5.1% IRR. this is because bonds lost a fair bit of money relative to bills as yields rose and have started to come down, so the dollars invested when bonds yielded as high as 5.5% are now experiencing (small) capital gains as yields come down to the mid 4's. this is the appeal of bonds, it's damn near impossible to lose nominal money starting from a small amount and adding to them with flows and reinvestment of coupon. I was wrong on timing and started early in accumulating bonds, but have started to edge bills because of flows at higher yields and re-investment of coupon, even though bills still yield more than bonds (and have throughout this time)

 

having something in toolkit that you know will make 4-5% on a 5-7 yr time horizon is nice. I just view it as slowly buying back my mortgage (technically buying everyone else's mortgage given MBS are big component of the AGG). none of it's very material but feeling slightly less stupid.

 

of course, US stocks have tonned it, so should have just put it all in US stocks. the benefits from DCA'ing in more volatile stocks would be even more pronounced. 

 

Is there a specific ETF for the bond index you use ?

[TwoCitiesCapital]

47 minutes ago, Red Lion said:

 

Ive been seeing this position for several years now, but it seems like there's a ton of companies that have performed great, but they just don't necessarily fit into the same mold. For example APO and KKR have done great, and APO still isn't even part of the S&P500. These are just two that I've followed, but there are plenty of others on these boards that have had great success with companies that don't really make a significant contribution to the index (like FFH and JOE).

 

For sure. And a huge chunk of my equity exposure has been in FFH and Exor. My returns in 2022 were actually quite positive as a result (overshadowed by my large exposure to crypto). 

 

But the S&P is an average, and includes 490ish companies that are largely among the leaders in their spaces, and the more and more I look - most have done bad-to-mediocre nominally and horribly on a real-adjusted basis over the last 1, 3, and 5 years for an asset class that is supposedly an inflation hedge. Pending how you structured your fixed income, there's a good chance you outperform a good chunk of the market just owning short/medium term fixed income over this period. 

 

The point isn't to say there's no stocks that have done well. The point is to say I'd rather try playing the equity game when most stocks are going up as opposed to try to pick the few that will. Odds are much more in your favor when there's a rising  tide and even your mistakes have a good chance of going up. 

 

I've done well selecting the few that did this time around - I wasn't as lucky in 2015 or 2018 trying to play that game. 

Edited August 21 by TwoCitiesCapital

[Red Lion]

4 minutes ago, TwoCitiesCapital said:

 

For sure. And a huge chunk of my equity exposure has been in FFH and Exor. My returns in 2022 were actually quite positive as a result (overshadowed by my large exposure to crypto). 

 

But the S&P is an average, and includes 490ish companies that are largely among the leaders in their spaces, and the more and more I look - most have done bad-to-mediocre nominally and horribly on a real-adjusted basis over the last 1, 3, and 5 years for an asset class that is supposedly an inflation hedge. Pending how you structured your fixed income, there's a good chance you outperform a good chunk of the market just owning short/medium term fixed income over this period. 

 

The point isn't to say there's no stocks that have done well. The point is to say I'd rather try playing the equity game when most stocks are going up as opposed to try to pick the few that will. Odds are much more in your favor when there's a rising  tide and even your mistakes have a good chance of going up. 

 

I've done well selecting the few that did this time around - I wasn't as lucky in 2015 or 2018 trying to play that game. 

 

All good points.

 

I think it all really hinges on where you hold your assets. In a tax deferred account, T-bills, MBS, and TIPs all look pretty attractive to just sit and take a big swing at a fat pitch. It just seems like there's always a fat pitch, so unless you're investing billions of dollars there will hopefully be places to invest where one anticipates good double digit returns. 

 

When you're using them in a taxable account individual account the numbers start to look really crappy. A 5% t bill that gets taxed at 40% is basically just keeping place with inflation (if that). And bonds are even worse because you owe state tax on the interest. So if you're making 6% gross, paying 50% state taxes, and still taking credit risk, it seems like a raw deal. 

 

I feel like C- corps and tax free entities and of course governments themselves are some of the biggest holders of bonds, probably because they don't have a hugely negative tax implication. 

 

If you're in a 401k and have fully funded retirement, maybe this would be a pretty good low risk way to just live out your days. It's hard for me to see wanting to keep a long term allocation to bonds though inside a retirement account if the goal is to fund a retirement through investment returns. If the goal is to park money until you see a fat pitch it makes plenty of sense in my mind, but holding onto a bunch of bonds until the MARKET is cheap/going up instead of looking for individual investments seems overly cautious and likely to result in subpar long term returns IMHO. 

 

 

 

[thepupil]

46 minutes ago, rohitc99 said:

Is there a specific ETF for the bond index you use ?

Just what I have in my 401k, vanguard bond index, boring AF.

[rohitc99]

16 hours ago, thepupil said:

Just what I have in my 401k, vanguard bond index, boring AF.

got it. thanks !