Bonds!

[TwoCitiesCapital]

1 hour ago, Parsad said:

 

No, it won't.  It will create a recession.  Cheers!

 

It may create a recession in the short term and will limit choice/competition and increase inflation intermediate/long term. 

Edited February 26 by TwoCitiesCapital

[thepupil]

Collapses from 50 bps? Corp spreads are historically tight. Is the belief that corporates will be regarded as more reliable payers than the treasury because of the work of our esteemed leader? 

maybe I’m missing something 

[Gregmal]

2 minutes ago, thepupil said:

Collapses from 50 bps? Corp spreads are historically tight. Is the belief that corporates will be regarded as more reliable payers than the treasury because of the work of our esteemed leader? 

maybe I’m missing something 

Yea essentially. Think we re getting to a point where people may view stuff like Apple/Meta/Berkshire types as more reliable 

[thepupil]

In such a scenario where “full faith and credit” becomes questioned (outside of the usual debt. Ceiling hullabaloo) I don’t want to own any USD denominated nominal obligations. 
 

If you think the US gov’s willingness to pay creditors is decreasing, I’d say other currencies / gold / BTC / guns / canned food the better trade.

 

Duration is for just your normal recession/slowdown.

 

it seems like a real stretch to think we see corps trade through tsy’s…think we’re just on a different page here 

Edited February 26 by thepupil

[Gregmal]

I own some of that stuff anyway and we’ve already seen scenarios where there’s some convergence that blew peoples minds. People scoffed at the MF idea in 2021, and in 2022/3 we saw cap rates trade at or in some cases lower than 10 year and FF rate. Things change, the world is unpredictable; I don’t need to be exactly 100% correct at every turn, just directionally accurate enough to put points on the board consistently and through the cycle. 

[thepupil]

Of course perpetual real assets can trade at lower going in yields than nominal obligations, but negative corporate spreads is a whole

nother ball game

 

the corporates don’t have a printer. 

[Gregmal]

A lot of it too short term comes down to what people believe, not what reality is. There’s so much TDS out there I can see it playing out. Oil clearly wasn’t worth -$32 a barrel or whatever in 2020, but it happened. A good chunk of the market, especially rubber stamping allocators are drunk on establishment thinking. Just look at all the doom posts here; Canadians talking about partnering up with supposed big bad China, etc. If the next recession comes shortly and the “US is doomed” narrative takes hold, I doubt spreads widen. It could get quite fun. 

[gfp]

I do feel like corporate spreads are so tight (basically 2007 extremes) that spreads widen if someone sneezes loudly.

[Parsad]

1 hour ago, TwoCitiesCapital said:

 

It may create a recession in the short term and will limit choice/competition and increase inflation intermediate/long term. 

 

Probably won't drive inflation even though people are fearful of inflation when the word tariff is thrown around.  It will create erratic prices on goods and will probably reduce consumption by the middle and lower classes.  If I was a mid-priced restaurant owner or retailer, I would be very worried right now.  As if things haven't been tough enough over the last four years, this will just make a deep recession into a depression for these owners.  

 

You'll also have probably millions in unemployed over the next year or so, and I think it will be a relatively deep recession.  Long term, with lower taxes and probably a lower annual deficit, along with retooling and relocation of thousands of businesses, the U.S. will see another long-term boom.  But that's probably at least two years out...probably may not even start showing up on the bottom line until the next administration.  I think there will be lots of pain in the next two-three years for the middle class, lower class, small business owners, seniors, minorities, etc.  

 

Rates will go lower over time, unemployment will rise for the next 2 years, debt and deficit will go up for a couple of years before flattening and going down relative to GDP, stock market will probably correct in the short-term and then go on a tear long-term.  I would also expect the U.S. dollar strength to dissipate over the next 18 months.  And global relationships will be shitty until the next administration arrives.  Cheers!

[Parsad]

1 hour ago, thepupil said:

In such a scenario where “full faith and credit” becomes questioned (outside of the usual debt. Ceiling hullabaloo) I don’t want to own any USD denominated nominal obligations. 
 

If you think the US gov’s willingness to pay creditors is decreasing, I’d say other currencies / gold / BTC / guns / canned food the better trade.

 

Duration is for just your normal recession/slowdown.

 

it seems like a real stretch to think we see corps trade through tsy’s…think we’re just on a different page here 

 

Unless the whole world starts balancing their budgets and paying down debt relative to GDP, the U.S. will remain the strongest currency in the world and the safe haven in a crisis.  The current level of strength will decrease with lower rates and other nations doing better, but it would take a magic bullet to remove the USD as the safe haven currency of the world. 

 

Unless Trump really fucks things up and the U.S. falls into a Depression.  I don't see that happening with government efficiency, lower taxes and forcing the retooling and relocation of U.S. businesses.  I'm not so much against what he's trying to do...just how he's doing it.  Rather than a scalpel, he's taking a chainsaw to everything and that could create unexpected consequences.  And the chainsaw is so partisan and reckless that it is entirely possible something does get fucked up!  Cheers!

[skanjete]

The most valuable advantage the USA has is that the US$ is the reserve currency of the world.

That's why the rest of the world is for a great part financing the deficits in the USA. The USA imports goods and exports promesses to the rest of the world. 

 

This fact is a source of endless power and wealth. 

If things are played right, you would think this could go on indefinitely.

 

As a thought experiment, one could wonder what could possible kill the reserve status of the US$?

- a default would do the trick of course, but this seems very improbable (although with the recurring debt ceiling problems....)

- hampering international trade would also provide a headwind. 

- big, growing and powerful enemies who have international ambitions and influence and also eye reserve currency status

- Different enemies could team up and trade within each other with other currencies than de US$.

- The USA could alienate allies, who would be less incentivised to continu using US$ in their trade with other currency blocs. 

- Certainly if these allies are an European bloc with a common currency with some reserve status characteristics of its own. 

- Suppose some of those opposing countries or blocs come knocking at Uncle Sams door with the promesses they got from him and actually ask the goods for their paper, the value of the US$ could drop like a stone. 

 

Actually, if you think about it, current American isolationism trends could set of one or more of these causes in motion at the same time.

Thus current policy could go a long way destroying the reserve currency status of the US$, herewith the value of the US$ and ultimately the US world Power.

 

 

 

[thepupil]

5 hours ago, gfp said:

I do feel like corporate spreads are so tight (basically 2007 extremes) that spreads widen if someone sneezes loudly.

 

Agreed. Spread tightening into a risk event is nonsensical, particularly at the long end. 
 

Goes against empirical precedent / lived experience and logic / first principles. 
 

Makes no sense to me, but “that’s what makes a market” 

 

 

 

 

[Paarslaars]

4 hours ago, Parsad said:

but it would take a magic ₿ullet to remove the USD as the safe haven currency of the world. 

 

Well you're right about that.  

[thowed]

Do you guys ever sleep?

 

Good discussion though.

[thepupil]

5 minutes ago, thowed said:

Do you guys ever sleep?

 

Good discussion though.

Ha, was working late last night. Early flight this AM…I do love how there’s time zone/schedule diversity on COBF so it’s never “off”. Like Bitcoin trading. 

[Gregmal]

Most people don’t see or imagine stuff until after it happens. Then it goes into the framework everyone uses and down the road gets explained away as something that made sense/was obvious despite no one seeing it that way in real time. Owning residential RE that every hack expert already claimed was in a bubble through an aggressive rate hike campaign? Owning the most expensive stocks that were also said to be a bubble into a pandemic where most of the world is forced into shutting down? That is two in just the past five years. 
 

Degradation of government paper vs comparable choices is hardly that farfetched, really just matters how events play out. And either way, in most scenarios where 10 year reverts to 2.5-3% I’m not seeing how this doesn’t work marvelously. Until then I just ignore it/make fun of myself for owning bonds.

Edited February 26 by Gregmal

[thepupil]

51 minutes ago, Gregmal said:

 And either way, in most scenarios where 10 year reverts to 2.5-3% I’m not seeing how this doesn’t work marvelously. Until then I just ignore it/make fun of myself for owning bonds.

agreed, duration will likely be the main driver of your position.

 

I’d be inclined to short corporate spreads here / rather than be long them.

 

i can use the same line of argument of “anything can happen” to argue that Meta should trade 1000 over, but that would go against empirical observation and the historical default rate of IG paper which is like <0.1%.
 

The spread on MSFT/META/AAPL bondcan be thought of as a minuscule default credit spread and a less minuscule but still small liquidity spread. 
 

I see no reason for either of those to go away. 
 

One reason for a liquidity spread is there are simply so many corporate cusips whereas treasure  notes and bonds only have a few per year. Buyers sellers are spread across tons of issuers and then tons of bonds of that issuer.
 

another reason for greater liquidity in treasuries is capital treatment by regulated entities.

 

now of course one can conceive how for a day or two some heretofore unbroken relationship can break down, but I still don’t understand any of your logic here beyond “it can happen”. I mean technically I can win the lottery tomorrow. But does that matter. 
 

rates will go down because of (insert macro reason for rates going down) but at the same time spreads will “collapse”. Because people are losing faith in the US government credit quality (those same folks bidding up long term  obligations of the government) so in the margin they’ll bid up corporates even more furiously? 

 

I am just befuddled by the reasoning here. I’ll give you credit for the independent thinking but am reminded of Benny G

 

“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right”

 

Contrarianism for its own sake feels just as if not more fraught than blind following of the consensus.

 

in the end, though, duration will drive the trade and none of this will

matter

 

 

 

[73 Reds]

2 hours ago, Gregmal said:

Most people don’t see or imagine stuff until after it happens. Then it goes into the framework everyone uses and down the road gets explained away as something that made sense/was obvious despite no one seeing it that way in real time. Owning residential RE that every hack expert already claimed was in a bubble through an aggressive rate hike campaign? Owning the most expensive stocks that were also said to be a bubble into a pandemic where most of the world is forced into shutting down? That is two in just the past five years. 
 

Degradation of government paper vs comparable choices is hardly that farfetched, really just matters how events play out. And either way, in most scenarios where 10 year reverts to 2.5-3% I’m not seeing how this doesn’t work marvelously. Until then I just ignore it/make fun of myself for owning bonds.

Yep.  Almost everything is obvious in hindsight but only those with foresight have anything to show for it.  The good news is we don't have to be able to predict most major events on which profits can be made correctly; defying prevailing opinion only once or on rare occasion is all it takes if you're willing to bet large.

[thepupil]

@Gregmal feast your eyes! 

 

Quote

US Corporates Are Latest Haven Play as Treasuries Get Whiplashed

Summary by Bloomberg AI

• US corporate bonds are experiencing less price movement than Treasuries, making them seem safer in some ways.
• Credit has avoided much of the volatility that has affected government bonds this year, with investment-grade yields being less volatile than US debt.
• Investors are chasing high yields in corporates, and valuations on the notes could stay elevated for some time, with the premium for owning US high-grade corporate bonds instead of similar-maturity government bonds hovering near lows seen before the 2008 financial crisis.

By Ethan M Steinberg

(Bloomberg) -- US corporate bonds are seeing less price movement than Treasuries, making the securities in some sense safer than their government counterparts, an unusual turn of events that seems to be stoking high valuations for company debt.

Credit has side-stepped much of the volatility that’s plagued government bonds this year. On a six-month rolling basis, investment-grade yields are less volatile than US debt, a dynamic that’s accelerated since the election, according to an analysis from Barclays Plc. 

Treasuries — the benchmarks that help set prices for everything from company debt to home loans, to other nation’s bonds — are still broadly considered the safest securities in US markets. 

But whiplash headlines and policy uncertainty are contributing to at least some reconsidering of how investors usually assess them against corporates. Company earnings and financial guidance offer more near-term certainty amid the rapid fire changes coming from the White House, according to Michael Brown at the online brokerage Pepperstone Group Ltd.

High-Grade Bonds Are Less Volatile Than Treasuries

A trend that occurs less often than not, it has accelerated since November

• Investment-grade yield volatility
• Benchmark Treasury yield volatility

020406080 bps2020202120222023202420252020

 

Source: Barclays Investment Bank, Bloomberg

Note: Based on six-month realized yield volatility

 

 

“Trying to accurately discount the fiscal policies or broader policies of the US government is next to impossible right now,” said the senior research strategist. “Whereas when you’re trying to discount the outlook for a corporate, it is somewhat easier to make a more high-conviction call.”

The bonds have been on a rollercoaster ride in the aftermath of President Donald Trump’s win. The yield on the 10-year reached 4.8% in mid-January, the highest level since November 2023, on concerns inflation was re-accelerating. Since then, the rate has dropped about 50 basis points amid fears the administration’s economic policies may slow growth.

That’s left investors chasing high yields in corporates — the rate on investment-grade debt has mostly held above 5% of late — and valuations on the notes could stay elevated for some time. The premium investors receive to own US high-grade corporate bonds instead of similar-maturity government bonds relative to the all-in yield on the debt, has been hovering near the lows of the months leading up to the 2008 financial crisis, Bloomberg-compiled data show.

The relative placidity in investment-grade debt can also be seen from a stock perspective. A 1% move in the S&P 500 Index this year has been associated with just a 1 basis-point move on a Markit measure of perceived credit risk, down from an average of 2 basis points over the past decade, according to Morgan Stanley research published last week.

Periods of subdued volatility in the investment-grade bond market usually coincide with larger inflows, Barclays analysts led by Dominique Toublan and Bradford Elliott wrote in a Feb. 14 note.

Recent data bear out that precedent. Mutual funds and ETFs that track high-grade bonds continue to post inflows, accelerating in the week ended Feb. 26 to $5.24 billion from $2.95 billion the week before. They have softened slightly since reaching a three-month high earlier this month, according to Bank of America research citing EPFR Global data.

Strategists and money managers say there are other reasons to stay bullish on the asset class. A promising economic backdrop is viewed as supportive of high-grade credit and its historically tight premiums. Overall, inflation has moderated from recent highs — though it topped forecasts this month — and job growth has remained healthy while earnings for the quarter, especially for the biggest banks, have been strong. 

“It’s this not-too-hot, not-too-cold environment that we see that’s been supportive for IG credit,” said Jon Curran, head of investment grade at Principal Asset Management.

Historical Shift

Part of the reason investors feel comfortable taking credit risk in this tight spread environment is that not all of them view history as the best metric for comparison given the evolution of the market structure.

In the investment-grade market, the compensation investors demand for shouldering the risk that issuers default is only a small component of the overall spread, according to Christian Roth, chief investment officer of global fixed income at Northern Trust Asset Management. 

The rest is made up of compensation for buying an asset that’s less liquid than a government bond. But the high-grade market has been growing more liquid as more traders embrace electronic and portfolio trading. High-grade trading averaged $34.6 billion per day in 2024, up 24% from the year before, according to JPMorgan Chase & Co.

“We are seeing a secular narrowing of credit spreads,” Roth said. “Maybe the historical long-term average is the wrong benchmark.” 

Still, risk premiums have widened recently from year-to-date tights, a trend being driven by falling Treasury yields. That comes after consumer confidence data earlier this week showed signs of weakness, as did a measure of US business activity. The drop in yields is likely triggering some “sticker shock” for investors, said Hans Mikkelsen, a credit strategist at TD Securities.

That trend may persist until more certainty emerges around tariffs, which can filter through to companies and consumers. But ultimately, he views recent spread widening as a “hiccup” bound to reverse course.

“The underlying US economy going into all of this is quite strong,” Mikkelsen said.

Elsewhere in credit markets:

 

[Gregmal]

lol nice 

[TwoCitiesCapital]

30 minutes ago, thepupil said:

@Gregmal feast your eyes! 

 

 

 

This is where you'd want to buy CDX on IG and HY. 

 

Anyone know if Ackman is doing that?!?!

[thepupil]

i completely agree. But without a clear catalyst it's a tough bet to make. Ackman's bet worked so well because he got short so much notional and monetized in a month. if he had to keep it for a year, he'd have been out hundreds of millions in premium rather than 10's. for a while there were ETF's to short CDX (WYDE) but it never gained traction...you could build your own by going long a tsy/tsy ETF and short IG ETF of course. VCLT /LQD puts funded with TLT / BND put sales or something 

[thepupil]

for example, you can sell the ATM TLT put for for what looks like a slight credit. this would leave you with no capital outlay, a little long of duration short the spreads. you have to do it in huge size to matter and are playhing for a pretty specific thing though

 

Edited Friday at 05:54 PM by thepupil

[TwoCitiesCapital]

1 hour ago, thepupil said:

for example, you can sell the ATM TLT put for for what looks like a slight credit. this would leave you with no capital outlay, a little long of duration short the spreads. you have to do it in huge size to matter and are playhing for a pretty specific thing though

 

 

Yea - Im playing it the boring way. Probably ~25% of my portfolio is in bond funds like RGVGX at this time.  Sold out of my TLT/ZROZ last month and replaced with calls - so still have some duration kicker, but not as much as I did a few months back.  

 

I'll just have to be content with modest gains on 25% of my portfolio that can be used to buy more of the remaining 75% when it drops. 

Edited Friday at 07:42 PM by TwoCitiesCapital