Bonds!

[Gregmal]

Looks like a home run for Bonds

 

[TwoCitiesCapital]

I dunno about America, but Trump is certainly making bonds great again. 

 

 

Short and intermediate bonds are now outperforming the S&P 500 on the rolling 12-month basis even before a recession has been announced or rate cuts started in earnest. 

[Gregmal]

[gfp]

Because taxes tariffs are inflation!

[wabuffo]

Short and intermediate bonds are now outperforming the S&P 500 on the rolling 12-month basis even before a recession has been announced or rate cuts started in earnest. 

 

Because the US economic growth component of yield is bleeding out.  

 

A secondary factor is that the US Treasury has maxed out its credit card and needs Congress to raise its limit.  There's been zero net issuance since mid-January - only redeem a dollar, issue a dollar.   But spending continues to flow out of the US Treasury and those monetary assets in the private sector are hunting for yield.   Basically same number of available seats, but more players are entering the game of musical chairs looking for a place to sit.

 

The Fed (and what it may or may not do) is irrelevant to long-term yields right now.

 

Bill

Edited April 4, 2025 by wabuffo

[Gregmal]

15 minutes ago, gfp said:

Because taxes tariffs are inflation!

Don’t worry. They’ll all learn lol 

[Red Lion]

Long duration TIPS certainly seem to have some hedging potential if the current market fear materializes (higher inflation and slower growth or recession). Wouldn’t this be a double tailwind for long duration TIPS if we have some short term inflation and lower long term bond yields at the same time? 

[TwoCitiesCapital]

1 hour ago, Red Lion said:

Long duration TIPS certainly seem to have some hedging potential if the current market fear materializes (higher inflation and slower growth or recession). Wouldn’t this be a double tailwind for long duration TIPS if we have some short term inflation and lower long term bond yields at the same time? 

 

Is unlikely that you get a significant acceleration in inflation AND lower rates. 

 

And unless if that is the case, TIPS would likely be killed with the rest of the bond market with rates rising in response to the higher inflation a la 2022. 

 

But with 10-year real yields at ~1.75%, you could get a boost to performance and outperform treasuries if inflation stays positive, but below 1.75%, and the TIPS re-rate to reflect that in the real yields.

 

Though I think the real bargain for TIPS was back when they were above 2+% real yields and nominal rates were higher as well. Not real sure on the direction of 10-year real yields will be to know if there's enough juice left in that squeeze going forward now that 0.50% has already been wrung out. 

Edited April 4, 2025 by TwoCitiesCapital

[tede02]

5 hours ago, TwoCitiesCapital said:

 

Is unlikely that you get a significant acceleration in inflation AND lower rates. 

 

And unless if that is the case, TIPS would likely be killed with the rest of the bond market with rates rising in response to the higher inflation a la 2022. 

 

But with 10-year real yields at ~1.75%, you could get a boost to performance and outperform treasuries if inflation stays positive, but below 1.75%, and the TIPS re-rate to reflect that in the real yields.

 

Though I think the real bargain for TIPS was back when they were above 2+% real yields and nominal rates were higher as well. Not real sure on the direction of 10-year real yields will be to know if there's enough juice left in that squeeze going forward now that 0.50% has already been wrung out. 

 

Yes. I also was going to reference 2022 when TIPS got hit with the rest of fixed income. I didn't own any at the time but I've made a mental note that even though inflation surged in 2022, TIPS took big market losses when the fed finally moved (intuitively one would think TIPS would do well in that type of environment). If you're holding to maturity it's no problem. But making a bet on long duration seems really risky. I worry that long-term rates could move materially higher (5%+) especially if there is some nutty tax-bill that pushes the deficit over $2 trillion or the economy goes into recession and stimulus starts again with borrowed money. Maybe Dalio and Jeffrey Gundlach are rubbing off on me too much but it feels like we're getting perilously close to the bond vigalantes checking the treasury market. Both parties seem to have embraced modern monetary theory whether they say so explicitly or not. I think it's just crazy that we're talking about cutting taxes with a budget deficit that is already over 6% of GDP and you have both Social Security and Medicare unambigously heading off a cliff within 7 years. I mean with Social Security, it literally says right on the statement that the program will not be able to fully fund payments by 2033. It probably is going to take some kind of financial crisis, which could be tipped off by rapidly rising rates, for meaningful budget reform. But the short of it is I'm personally staying away from duration. But of course, that's been the best place to be over the last two days!

[Red Lion]

I was thinking this is sort of the opposite of 2022. We have a tariff shock that seems likely to cause significant short term inflation while long term yields are dropping along with a steep sell off in equities. 
 

It seems like the market is worried about a recession / stagflation situation with compressed longer term yields. 
 

I’m not predicting this, but it seems like that would be an optimal position for long term tips no? 

[tede02]

Tactically, you could be right. Long rates have fallen hard the last two days. But I would be thinking about the next question, that being, if rates fell another 50 to 100bps, when would you get out?

[TwoCitiesCapital]

1 hour ago, tede02 said:

 

Yes. I also was going to reference 2022 when TIPS got hit with the rest of fixed income. I didn't own any at the time but I've made a mental note that even though inflation surged in 2022, TIPS took big market losses when the fed finally moved (intuitively one would think TIPS would do well in that type of environment). If you're holding to maturity it's no problem. But making a bet on long duration seems really risky. I worry that long-term rates could move materially higher (5%+) especially if there is some nutty tax-bill that pushes the deficit over $2 trillion or the economy goes into recession and stimulus starts again with borrowed money. Maybe Dalio and Jeffrey Gundlach are rubbing off on me too much but it feels like we're getting perilously close to the bond vigalantes checking the treasury market. Both parties seem to have embraced modern monetary theory whether they say so explicitly or not. I think it's just crazy that we're talking about cutting taxes with a budget deficit that is already over 6% of GDP and you have both Social Security and Medicare unambigously heading off a cliff within 7 years. I mean with Social Security, it literally says right on the statement that the program will not be able to fully fund payments by 2033. It probably is going to take some kind of financial crisis, which could be tipped off by rapidly rising rates, for meaningful budget reform. But the short of it is I'm personally staying away from duration. But of course, that's been the best place to be over the last two days!

 

TIPS suffer from a similar negative convexity as mortgages, but in the opposite direction. 

 

The principal adjustments all adjust the maturity payment - which pulls the duration of the bond outwards towards maturity. 

 

So in a rising rate/inflation environment, the duration of the bond is extending AS rates rise, or falls more slowly, where the duration  of treasury bonds is falling quite a bit more rapidly. 

 

You're underperforming treasuries on the initial rate shock as a result. Now, overtime, the increased coupons payments and principal payments make it back, but you can get really hammered on the initial rise. 

 

Edited April 5, 2025 by TwoCitiesCapital

[TwoCitiesCapital]

45 minutes ago, Red Lion said:

I was thinking this is sort of the opposite of 2022. We have a tariff shock that seems likely to cause significant short term inflation while long term yields are dropping along with a steep sell off in equities. 
 

It seems like the market is worried about a recession / stagflation situation with compressed longer term yields. 
 

I’m not predicting this, but it seems like that would be an optimal position for long term tips no? 

 

I don't think rates rise for one-off inflations. 

 

If there's a bird flu and chicken/egg prices rise as a result of a significant reduction in the chicken population, I don't expect that to result in higher yields. It's not a durable or sustained inflation. It's a one off supply hit that gets absorbed via time, substitutions, and higher prices that are temporary. 

 

I'd argue the same for tariffs. The price increase happens once, but isn't persistent. 

 

Monetary inflations are what your concerned with in bonds/rates. 

 

32 minutes ago, tede02 said:

Tactically, you could be right. Long rates have fallen hard the last two days. But I would be thinking about the next question, that being, if rates fell another 50 to 100bps, when would you get out?

 

That's always the question. I don't pretend to know where the bottom is at - especially with the untenable fiscal path the US funds itself in. But I don't think 4% is going to be it. As we inch closer to 3%, I'd probably start taking significant portions of the position off though. 

Edited April 5, 2025 by TwoCitiesCapital

[Red Lion]

12 hours ago, TwoCitiesCapital said:

 

I don't think rates rise for one-off inflations. 

 

If there's a bird flu and chicken/egg prices rise as a result of a significant reduction in the chicken population, I don't expect that to result in higher yields. It's not a durable or sustained inflation. It's a one off supply hit that gets absorbed via time, substitutions, and higher prices that are temporary. 

 

I'd argue the same for tariffs. The price increase happens once, but isn't persistent. 

 

Monetary inflations are what your concerned with in bonds/rates. 

 

 

That's always the question. I don't pretend to know where the bottom is at - especially with the untenable fiscal path the US funds itself in. But I don't think 4% is going to be it. As we inch closer to 3%, I'd probably start taking significant portions of the position off though. 

That’s kind of why I was thinking duration on tips could make sense. And maybe I don’t understand because I’m definitely NOT a bond expert or even close. 
 

But let’s say we have 5% cumulative extra inflation due to a one time tariff increase (that hopefully gets rolled back in a few years) and also have 10 year yields drop to 3%. If that happened over a year you would get a high teens return on a 10 year TIP right? 

[TwoCitiesCapital]

2 hours ago, Red Lion said:

That’s kind of why I was thinking duration on tips could make sense. And maybe I don’t understand because I’m definitely NOT a bond expert or even close. 
 

But let’s say we have 5% cumulative extra inflation due to a one time tariff increase (that hopefully gets rolled back in a few years) and also have 10 year yields drop to 3%. If that happened over a year you would get a high teens return on a 10 year TIP right? 

 

No, because you don't collect the 5% upfront. That 5% gets added to the par/principal paid at maturity. The price? Should discount that adjustment all the way back to today and the price move would be expected to be significantly smaller.

 

I'd argue that the real-yields expectations is going to be more impactful to the day-to-day trading than the actual inflation adjustments - those only matter over a long-period of time if you're holding the bond to maturity. 

[Red Lion]

1 hour ago, TwoCitiesCapital said:

 

No, because you don't collect the 5% upfront. That 5% gets added to the par/principal paid at maturity. The price? Should discount that adjustment all the way back to today and the price move would be expected to be significantly smaller.

 

I'd argue that the real-yields expectations is going to be more impactful to the day-to-day trading than the actual inflation adjustments - those only matter over a long-period of time if you're holding the bond to maturity. 

Thank you. That makes sense. 

[tede02]

10-year is inching up a bit. Very different reaction compared to March 2020. It's notable. 

[mattee2264]

I'm keeping things pretty short because 4% or so is a decent risk-free return and gives me some dry powder.

 

4% on long term bonds seems barely adequate and there are some risks if deglobalisation and resources shortages and other factors result in average inflation settling in the 3-4% range rather than returning to target. Not to mention the unsustainable path of US government debt. 

 

Near term tariffs could be inflationary not just from the price impact but also from supply chain disruptions. 

 

It was tempting to lock in 5% long term yields while they were around and I regret a bit not doing so. But I don't think we are returning to ZIRP and there isn't enough of a term premium to push me into long term bonds and betting on a recession is a bit speculative especially as there could be a stagflation scenario. 

[gfp]

 

Hmmm...  I'm not huge on charts but I'm gonna say this 10 year yield is headed back down

[tede02]

Yields have already popped back up to pre "liberation day." Man, duration just seems really risky. I guess the Fed could always come into the market with QE and push yields lower but no way I'm making that bet. 

[gfp]

5 minutes ago, tede02 said:

Yields have already popped back up to pre "liberation day." Man, duration just seems really risky. I guess the Fed could always come into the market with QE and push yields lower but no way I'm making that bet. 

 

Economic weakness and flight to safety is what pushes yields lower.

[TwoCitiesCapital]

Once the Fed starts cutting in earnest, term structure will force longer term yields lower. I don't know where the bottom is - I don't think it's 0.25% like it was in 2020. 

 

But sub-3% seems doable in a recessionary scenario. And I'm waiting for 3% before meaningfully reducing my duration - but have been sweeping daily P/Ls from bond funds to equity funds over the last week or so. 

[Gregmal]

It’s definitely noise most likely self inflicted, but imagine having a plan to freak out market and lower rates….then not being able to control yourself and retweeting some iteration of what you’re trying to do, in the midst of fucking with a lot of holders of the treasuries? 
 

Well if I was an adversary, I’d be dumping treasuries straight into those “negotiations”. 

[Gregmal]

Not number one on my list of expectations, but would be pure badass if Xi instead of doing the normal, “see your tariffs and raise you” simply goes “we re dumping all our treasures, and will resume negotiations in December 2026”. 

[Blake Hampton]

1 hour ago, Gregmal said:

It’s definitely noise most likely self inflicted, but imagine having a plan to freak out market and lower rates….then not being able to control yourself and retweeting some iteration of what you’re trying to do, in the midst of fucking with a lot of holders of the treasuries? 
 

Well if I was an adversary, I’d be dumping treasuries straight into those “negotiations”. 

And this doesn't scare you at all?