Bonds!

[drzola]

James; Sorry for late response to your inquiry.

I bought the BAC-L and WFC-L preferreds in Registered CDN Accounts to hedge my large BAC and WFC Tarp warrants held then and collect above my base annual yield  target ( 8% post tax CDN FX ) at the time on the principle I used.

I am soon to be in Registered account dispositon mode so most likely will not add to these at any time in future.

I seem to be more interested in qualifying CDN  rate reset preferred dividends in Non registered accounts for Relatives with non Defined Pensions now.   Several issues i.e BCE-PD.to and FFH-PF.to are at or above my 8% post tax annual yield target for some relatives incomes here.

 

[james22]

Interesting. Thanks, drzola.

[james22]

On 8/31/2023 at 12:44 PM, TwoCitiesCapital said:

Just seems very rearview mirror-ish. . . 

 

Yeah, I don't think it was intended to be actionable.

 

Just a recognition of what an odd period it has been.

[tede02]

On Jeffrey Gundlach's quarterly call this afternoon, at the very end he made a quip about one of their ETFs that caught my attention. One of their newer offerings is DCMB. Basically buys CMBS. Gundlach said if you want to beat money market funds over the next year without taking much risk, buy DCMB. Portfolio is 95% AAA with a duration of 1 and a YTM slightly under 7%. 

 

 

[tede02]

I bought TIPS for the first time this week with real yields over 2% (chart is slightly out dated). When you think about earning a 2% real yield on cash, that is pretty damn good historically. aven't been in this range much historically. 

[Dinar]

1 hour ago, tede02 said:

I bought TIPS for the first time this week with real yields over 2% (chart is slightly out dated). When you think about earning a 2% real yield on cash, that is pretty damn good historically. aven't been in this range much historically. 

TIPS are NOT cash.  They are bonds, albeit inflation indexed ones.  

[tede02]

23 minutes ago, Dinar said:

TIPS are NOT cash.  They are bonds, albeit inflation indexed ones.  

 

Yes, absolutely. The quip about return on cash was personal to me. IE the money I used to buy the TIPS would otherwise be in cash or treasuries.

Edited September 14, 2023 by tede02

[TwoCitiesCapital]

The latest macro voices has Harley Bassman on talking about how rich convexity is currently priced and how to take advantage of it. 

 

Simplify, the ETF firm he's associated with, will be launching a MBS ETF structured specifically to take advantage of the convexity premium so you can keep your eyes open for that. 

 

Not a bad way to get some spread and convexity premium without having to take much duration risk. I'll likely be adding it to the fixed income portfolio when launched as I've been a big buyer of core bond funds specifically for the MBS exposure and this will be a cleaner/better way to achieve the same thing. 

Edited September 18, 2023 by TwoCitiesCapital

[tede02]

Long yields jumped again. 10 year is closing in on 4.5%. Shorter duration TIPS are 2.5-3% real yield. I'm dumping my I Bonds and moving to TIPS. 

[TwoCitiesCapital]

2 hours ago, tede02 said:

Long yields jumped again. 10 year is closing in on 4.5%. Shorter duration TIPS are 2.5-3% real yield. I'm dumping my I Bonds and moving to TIPS. 

 

I'm putting in orders for more intermediate funds myself. The TIPS is an interesting call - they got killed last year. A reversal in rates AND inflation would do well! 

 

Copper-tp-gold ratio that Gundlach uses to estimate fair value of the 10-year based on inflation/growth is suggesting fair value @ ~2.5%. Would be near a 20% return in treasuries if that were to happen in the next 12-months. 

[tede02]

1 hour ago, TwoCitiesCapital said:

 

I'm putting in orders for more intermediate funds myself. The TIPS is an interesting call - they got killed last year. A reversal in rates AND inflation would do well! 

 

Copper-tp-gold ratio that Gundlach uses to estimate fair value of the 10-year based on inflation/growth is suggesting fair value @ ~2.5%. Would be near a 20% return in treasuries if that were to happen in the next 12-months. 

 

I'll take it!  The last 12-18 months have been amazing to follow. Consensus has been wrong over and over again. I got out of PFIX earlier this year when it looked like long rates had since peaked. Big mistake! My humility is only allowing me to buy 5-year TIPS in case yields actually move higher for longer. But if real yields hit 3%, I'll probably dabble in some 10-year on money that I would otherwise just have parked in cash/I Bonds, etc. 

[TwoCitiesCapital]

1 hour ago, tede02 said:

 

I'll take it!  The last 12-18 months have been amazing to follow. Consensus has been wrong over and over again. I got out of PFIX earlier this year when it looked like long rates had since peaked. Big mistake! My humility is only allowing me to buy 5-year TIPS in case yields actually move higher for longer. But if real yields hit 3%, I'll probably dabble in some 10-year on money that I would otherwise just have parked in cash/I Bonds, etc. 

 

+1

 

Also made modest profits on PFIX. Definitely didn't hold it long enough! I figured 3-3.5% would be the max for the Fed as I didn't anticipate their willingness to kill the economy and the banking sector. I was obviously wrong there, but still think 3.5% is probably too restrictive over time. 4.5% certainly will be IMO. 

[Spekulatius]

37 minutes ago, TwoCitiesCapital said:

I figured 3-3.5% would be the max for the Fed as I didn't anticipate their willingness to kill the economy and the banking sector. I was obviously wrong there, but still think 3.5% is probably too restrictive over time. 4.5% certainly will be IMO. 

As far as I can tell, the economy and the banking sector are still alive.

[tede02]

37 minutes ago, Spekulatius said:

As far as I can tell, the economy and the banking sector are still alive.

 

I know what you mean. Growth seems to be hanging in there. That said, I think if I were on the Fed board, I would be in the camp of lets hold rates steady and see what happens. The pressure is building with mortgage rates around 7% and auto loans in the same ball-park. Credit cards north of 20%. Consumers can deal with it in the short run by just doing nothing. But as people need to update their vehicles, move or just incur large expensese they were accustomed to borrowing for with cheap credit, it's going to bite more and more as each quarter ticks by. We'll see what happens. 

[TwoCitiesCapital]

2 hours ago, Spekulatius said:

As far as I can tell, the economy and the banking sector are still alive.

 

Yes, still alive and shrinking. 

 

We all know of the bank failures back in March. Regional bank earnings have fallen QoQ 10-15% since simply on the negative carry of the liquidity provided which has only gotten worse with subsequent hikes and is BEFORE any credit weakness which we are beginning to see.

 

We also saw the Fed basically undo the entirety of the QT it has accomplished with the liquidity to banks which also helped support markets. We're now starting to see some of that liquidity/support come back out and rates have been hiked since which has further exacerbated the profitability picture. 

 

We may not see more liquidity driven failures, but the earnings profile going forward is trash - especially for regionals. Total loans outstanding has been largely flattish for the year - not yet a contraction but definitely a negative from a credit perspective when considering general prices have risen over that time and the economy needs a constant flow of increasing credit to grow. 

 

As far as the economy? most leading economic indicators point to a significant slow down and have been for a bit. Now that we have the exhaustion of covid savings, restarting student loans payments, raises that have fallen below inflation again, and an unemployment rate that has continued to creep up, we'll see if that resilience lasts. 

 

GDI which attempts to measure the same thing as GDP, but from different sources, has been in contraction for the last 3 quarters. That contraction is supported by lower tax receipts. My guess is that it'll be GDP that follows it down as opposed to GDI being revised up. 

Edited September 21, 2023 by TwoCitiesCapital

[thepupil]

Here's kind of a cool illustration of the nice (IMO) risk profile of bonds right now. 

 

the ESS 2048's yield 6.5% right now. they won't default unless the value of apartments in california declines by like 70%, so let's ignore the whole credit risk thing. 

 

On a 5 yr basis, they'll return between 2%/yr and 13%/yr depending where yields end up at +-300 bps. So you can buy a bond that's maturing in 25 years, rates could go up over the next 5 year ssuch that that bond will be yielding 9.5% and you won't lose money. you may lose purchasing power for sure, but you won't lose nominal $$$. now I'd probably dismiss the extreme upper end (the 12%/yr) and the extreme lower (the 2% / yr). 

 

I also think it's a nice illustration of why it makes sense to potentially take a little corporate spread/liquidity risk (they have the 30 yr treasury return next to it) the ESS bond does better in all scenarios except the extreme -300 bp change in yields. 

 

 

[Gregmal]

1 hour ago, thepupil said:

Here's kind of a cool illustration of the nice (IMO) risk profile of bonds right now. 

 

the ESS 2048's yield 6.5% right now. they won't default unless the value of apartments in california declines by like 70%, so let's ignore the whole credit risk thing. 

 

On a 5 yr basis, they'll return between 2%/yr and 13%/yr depending where yields end up at +-300 bps. So you can buy a bond that's maturing in 25 years, rates could go up over the next 5 year ssuch that that bond will be yielding 9.5% and you won't lose money. you may lose purchasing power for sure, but you won't lose nominal $$$. now I'd probably dismiss the extreme upper end (the 12%/yr) and the extreme lower (the 2% / yr). 

 

I also think it's a nice illustration of why it makes sense to potentially take a little corporate spread/liquidity risk (they have the 30 yr treasury return next to it) the ESS bond does better in all scenarios except the extreme -300 bp change in yields. 

 

 

Ok so using this, and it is a little interesting, what’s the high conviction argument for owning ESS equity if the expectations are 5-10% vs the note?

[thepupil]

14 minutes ago, Gregmal said:

Ok so using this, and it is a little interesting, what’s the high conviction argument for owning ESS equity if the expectations are 5-10% vs the note?

I own both. I bought the equity first @ like 6 cap and bought this thing at 6.4%. One has long term inflation protection / growth, the other has more bounded return profile (absent extreme increase in rates).
 

I don’t think either are “high conviction” or super special, but just part of a portfolio that will hopefully preserve/grow purchasing power.I like todays environment of 6%+ caps and 6% + IG yields instead of 4 caps and 3 yields.

bonds are cool and all but I still always want to have bull of assets in stuff that isn’t  nominal obligations.

[Gregmal]

6 minutes ago, thepupil said:

I own both. I bought the equity first @ like 6 cap and bought this thing at 6.4%. One has long term inflation protection / growth, the other has more bounded return profile (absent extreme increase in rates).
 

I don’t think either are “high conviction” or super special, but just part of a portfolio that will hopefully preserve/grow purchasing power.I like todays environment of 6%+ caps and 6% + IG yields instead of 4 caps and 3 yields.

bonds are cool and all but I still always want to have bull of assets in stuff that isn’t  nominal obligations.

Gotcha. What I kind of struggle with isn’t necessarily needing Herculean returns. But as a base, I’m always 100% invested. So generally I view the margin cost as a mandatory hurdle, plus whatever I view as risk adjusted appropriate above that. So with MF, risk here imo is super low, but saying 7-10% returns doesn’t leave much margin of safety and without an upside catalyst it just looks a little too static within most scenarios. If I’m in the 5-10% return range, why not just buy notes or bonds? Which is kinda the @TwoCitiesCapitalargument with a lot of stuff, and despite playing devils advocate often, agree that if these are your expectations, why bother? I guess the disagreement is that I think there’s plenty of equities than can do 10-20% for at least a few years which is adequate. But let’s say I didn’t see any of those, then yea I’d struggle reaching on equities for maybe an extra 1-4%.

 

Thinking about it a bit recently and maybe the answer is selling somewhat outta the money puts on some of these. 

[dealraker]

23 hours ago, Gregmal said:

Gotcha. What I kind of struggle with isn’t necessarily needing Herculean returns. But as a base, I’m always 100% invested. So generally I view the margin cost as a mandatory hurdle, plus whatever I view as risk adjusted appropriate above that. So with MF, risk here imo is super low, but saying 7-10% returns doesn’t leave much margin of safety and without an upside catalyst it just looks a little too static within most scenarios. If I’m in the 5-10% return range, why not just buy notes or bonds? Which is kinda the @TwoCitiesCapitalargument with a lot of stuff, and despite playing devils advocate often, agree that if these are your expectations, why bother? I guess the disagreement is that I think there’s plenty of equities than can do 10-20% for at least a few years which is adequate. But let’s say I didn’t see any of those, then yea I’d struggle reaching on equities for maybe an extra 1-4%.

 

Thinking about it a bit recently and maybe the answer is selling somewhat outta the money puts on some of these. 

"People seek status, tell stories, and imitate" says investment book writer William Bernstein.  We all sorta do that.  Here comes another one from Charlie (that's me) related to my potential success and/or confidence in bond investing.

 

My uncle ran the world's 2nd largest bedroom furniture maker United Furniture in Lexington, NC.  My great uncle ran the world's largest bedroom furniture maker Dixie/Lexington Furniture.  In general things went well for them and the many associated with them.

 

Twice they funded Wellington Hall to produce upscale non-bedroom furniture, both times infusing $5 mil - both combined - back 50 years ago when $5 million was real money.  Twice they lost it all.

 

I am Robert and Smith - their names - as to bedroom furniture when related to stock investing.  Bond investing is Wellington Hall all the way.  Things seem similar to a lot of people with stocks and bonds as with bedroom and dinining/living room furniture...but we all know this sort of story...it ain't true.  

 

You guys keep writing, I'm reading.  I'm designated to steer some trust fund money for several eventuall receivers over the next few years and I will be needing some bonds in them and as to fixed I'm swimming like the 12 month old who fell in the swimming pool.   

 

No hurry, never am.  While I'm little fazed if maybe even not-at-all-fazed by market gyrations those watching the trusts are of course far different than me.   Short term bonds...yea, that's my interest here.  I'd say 4 years and less.  

[thepupil]

Well today I bought some bonds maturing in 2112, so my approach is slightly different .

 

specifically, I’ve spent the past month or so accumulating the illiquid Bowdoin 4.69%’s of 2112 at $76 / 6.2% yield. 
 

delicious perpetual yield.

[dealraker]

15 minutes ago, thepupil said:

Well today I bought some bonds maturing in 2112, so my approach is slightly different .

 

specifically, I’ve spent the past month or so accumulating the illiquid Bowdoin 4.69%’s of 2112 at $76 / 6.2% yield. 
 

delicious perpetual yield.

Remember this is not my money nor my timeline.

[Gregmal]

34 minutes ago, thepupil said:

Well today I bought some bonds maturing in 2112, so my approach is slightly different .

 

specifically, I’ve spent the past month or so accumulating the illiquid Bowdoin 4.69%’s of 2112 at $76 / 6.2% yield. 
 

delicious perpetual yield.

LOL I actually just for shits in a small account bought $10k of those ESS 2048s. Print showed me losing 1.7% today on them. I think this has got to be somewhat of a product of just boredom. 

[tede02]

21 hours ago, dealraker said:

"People seek status, tell stories, and imitate" says investment book writer William Bernstein.  We all sorta do that.  Here comes another one from Charlie (that's me) related to my potential success and/or confidence in bond investing.

 

My uncle ran the world's 2nd largest bedroom furniture maker United Furniture in Lexington, NC.  My great uncle ran the world's largest bedroom furniture maker Dixie/Lexington Furniture.  In general things went well for them and the many associated with them.

 

Twice they funded Wellington Hall to produce upscale non-bedroom furniture, both times infusing $5 mil - both combined - back 50 years ago when $5 million was real money.  Twice they lost it all.

 

I am Robert and Smith - their names - as to bedroom furniture when related to stock investing.  Bond investing is Wellington Hall all the way.  Things seem similar to a lot of people with stocks and bonds as with bedroom and dinining/living room furniture...but we all know this sort of story...it ain't true.  

 

You guys keep writing, I'm reading.  I'm designated to steer some trust fund money for several eventuall receivers over the next few years and I will be needing some bonds in them and as to fixed I'm swimming like the 12 month old who fell in the swimming pool.   

 

No hurry, never am.  While I'm little fazed if maybe even not-at-all-fazed by market gyrations those watching the trusts are of course far different than me.   Short term bonds...yea, that's my interest here.  I'd say 4 years and less.  

 

For trust money, treasurys are about as good as they've been across the curve anytime the last the 20 years. If you're worried about recession, nominal yields on bills and notes are basically 5% plus or minus 50 bps. If you're worried about inflation, REAL yields on TIPS are 2.5-3% which has piqued my interest for my bucket of safe money. 

 

I got a good laugh when Jeff Gundlach said the new mantra for individual investors is "T-bill and chill." LOL. 

 

[dealraker]

1 hour ago, tede02 said:

 

For trust money, treasurys are about as good as they've been across the curve anytime the last the 20 years. If you're worried about recession, nominal yields on bills and notes are basically 5% plus or minus 50 bps. If you're worried about inflation, REAL yields on TIPS are 2.5-3% which has piqued my interest for my bucket of safe money. 

 

I got a good laugh when Jeff Gundlach said the new mantra for individual investors is "T-bill and chill." LOL. 

 

Thanks tede02.