Bonds!

[Gregmal]

1 minute ago, Dinar said:

@Gmthebeau, sure, if you hold bonds to maturity, you don't lose money in nominal terms, you actually make money.  However I presume that most people care about purchasing power=real wealth, and once you take inflation and taxes into account, you can easily end up with a huge loss in real terms even if you hold long term bonds to maturity.  TIPS, in my opinion, are a different story.  

And there exactly is the somewhat higher level truth. 
 

Which, not that I totally agree with it, is why there’s actually a decently logical case for owning some of these mega caps like Apple over bonds. Inflation protection. 
 

That and then there’s also the whole “hold to maturity” thing. Everyone thinks it’s just as easy as “holding”, but then the clock starts. How many 15/20/30 year horizons does one get in an investing lifetime? You can’t really find a single 20 year stretch in history where purchasing power didn’t greatly erode over a couple decades. That’s when you realize stocks are obviously better.

[Gmthebeau]

35 minutes ago, Dinar said:

@Gmthebeau, sure, if you hold bonds to maturity, you don't lose money in nominal terms, you actually make money.  However I presume that most people care about purchasing power=real wealth, and once you take inflation and taxes into account, you can easily end up with a huge loss in real terms even if you hold long term bonds to maturity.  TIPS, in my opinion, are a different story.  

 

If you don't think the FED will get inflation back to 2% TIPS are a better value, but if you think they will be successful and with the massive amount of debt out there, if we ever have any fiscal discipline (compared to what Trump/Biden did) then if we even have a year or so of deflation then regular treasuries will be better than TIPS.   

[tede02]

21 minutes ago, Gmthebeau said:

 

If you don't think the FED will get inflation back to 2% TIPS are a better value, but if you think they will be successful and with the massive amount of debt out there, if we ever have any fiscal discipline (compared to what Trump/Biden did) then if we even have a year or so of deflation then regular treasuries will be better than TIPS.   

 

This is exactly what I've been thinking about. If we get a hard landing, probably will have some deflation. I've bought TIPS and regular notes because I don't have strong conviction either way. I hope we get a soft landing but who the hell knows. 

[Gmthebeau]

2 minutes ago, tede02 said:

 

This is exactly what I've been thinking about. If we get a hard landing, probably will have some deflation. I've bought TIPS and regular notes because I don't have strong conviction either way. I hope we get a soft landing but who the hell knows. 

 

hard landing is most likely because it will be hard to bring inflation back to 2% without it, and the FED won't fail because they would lose all credibility.

[Spekulatius]

Looks like the inverted yield curve is getting fixed, but not in the way that people expected. Now LT interest rates go up rather than short term interest rates go down.

[adesigar]

10 year needs to get a move on. Its lagging between the 2 year and 30 year. 

[TwoCitiesCapital]

27 minutes ago, Spekulatius said:

Looks like the inverted yield curve is getting fixed, but not in the way that people expected. Now LT interest rates go up rather than short term interest rates go down.

 

Pain trade for everyone was higher long term rates. 

 

Does 2023 end similarly to 2018? Give everything back in the 4th? 

[gfp]

Not sure where to post this, but there was another super obvious intervention in USD-JPY today.  There are some real stresses under the surface of the global funding markets.  I actually think the big long bond breakdown everyone is obsessing about is just a regular seasonal move that happens every year lately but we'll find out soon enough if this is a head-fake.

[Spekulatius]

25 minutes ago, gfp said:

Not sure where to post this, but there was another super obvious intervention in USD-JPY today.  There are some real stresses under the surface of the global funding markets.  I actually think the big long bond breakdown everyone is obsessing about is just a regular seasonal move that happens every year lately but we'll find out soon enough if this is a head-fake.

YEN-USD is at a multi year low. The yen has absolutely gotten clobbered.

[gfp]

5 minutes ago, Spekulatius said:

YEN-USD is at a multi year low. The yen has absolutely gotten clobbered.

 

Same as CNY

 

[Gamecock-YT]

Great time to take a trip to Japan. Got to 150 this time last year as they were reopening to tourists

[changegonnacome]

 

 

[Dinar]

He is absolutely correct, however I think that there are a couple of nuances that ought to be addresses.  

 

a) If and when in say five to ten years, you no longer can get ten percent on super high quality private credit, will that cause the equity market to reprice higher, and will the returns be higher in equities over that five to ten year period than in private credit?

 

b) When PM is borrowing at say 6-6.5% for ten year paper, I wonder how good credits are that are paying ten percent plus?

 

c) Lastly, I am not sure that ten percent plus is available for the investors.  OCSL, which is an Oaktree vehicle is not generating ten percent on unlevered capital, it is generating much less due to rather high in my opinion, management fees.

 

So he is essentially comparing apples and oranges: credit product before fee (which is only available on a post fee basis) and equity product that can be purchased with no fees (index.)  While returns on credit product might be competitive with equities, what investors will receive will probably be much less and not competitive with equities.

[Spekulatius]

You can get equity like returns in credit taking equity like risk.

[tede02]

10 hours ago, Spekulatius said:

You can get equity like returns in credit taking equity like risk.

 

LOL. Spot on! 

[james22]

11 hours ago, Dinar said:

He is absolutely correct, however I think that there are a couple of nuances that ought to be addresses.  

 

d) Everything's relative. X% in fixed looks good until Tech stocks return 5X%.

[TwoCitiesCapital]

14 hours ago, Spekulatius said:

You can get equity like returns in credit taking equity like risk.

 

Not exactly how it works. Bonds have exhibited equity like risk over the last 2-years given the low yields. So the risk was highest when priced the lowest. Now that they've repriced, it's be very hard to get another year of 10-15% losses and thus very hard to get equity like risk going forward. 

 

To get a 5+% unrealized loss on core bond funds going forward, you'd need some combination of IG spreads blowing out, mortgage spreads blowing out further than they have (already @ 2008 levels), or rates to go 1.5 - 2% higher. That's what it's going to take to overcome the interest accrual and amortization accrual over the next 12 months. It's a high bar to lose money in high quality credit today. 

 

I.e. not equity-like risk. 

 

Edited October 4, 2023 by TwoCitiesCapital

[Spekulatius]

48 minutes ago, TwoCitiesCapital said:

 

Not exactly how it works. Bonds have exhibited equity like risk over the last 2-years given the low yields. So the risk was highest when priced the lowest. Now that they've repriced, it's be very hard to get another year of 10-15% losses and thus very hard to get equity like risk going forward. 

 

To get a 5+% unrealized loss on core bond funds going forward, you'd need some combination of IG spreads blowing out, mortgage spreads blowing out further than they have (already @ 2008 levels), or rates to go 1.5 - 2% higher. That's what it's going to take to overcome the interest accrual and amortization accrual over the next 12 months. It's a high bar to lose money in high quality credit today. 

 

I.e. not equity-like risk. 

 

Risk premiums blowing out is something I would be concerned about. The bond risk premiums are right now fairly small. These moves in risk premium can dwarf any moves in underlying risk free rates. Then add to this the poor liquidity in the more junky paper that Howard Marks is talking about. The poor liquidity can exasperate the move in junk bonds  preferred and the like. So I think the highly liquid treasures are probably the best buy right now.

[Gregmal]

For all the bond fanfare, it honestly seems no better or different than stocks in that it’s a pickers market. The arguments so far have been bonds did great “here or there” but it then gets diced up and turns out long bonds did well here but lost 50% last few years. So then it’s short term bonds and notes but then you expand the timeline and those do terrible over the long haul. It’s no different at all than stocks. Buyer beware. The search for a magic cure all within the investor world continues. So far the one winner unfortunately seems to be index trackers and Berkshire. 

Edited October 4, 2023 by Gregmal

[TwoCitiesCapital]

11 minutes ago, Spekulatius said:

Risk premiums blowing out is something I would be concerned about. The bond risk premiums are right now fairly small. These moves in risk premium can dwarf any moves in underlying risk free rates. Then add to this the poor liquidity in the more junky paper that Howard Marks is talking about. The poor liquidity can exasperate the move in junk bonds  preferred and the like. So I think the highly liquid treasures are probably the best buy right now.

 

They're average in IG and HY. Not small. Not large. Average relative to history. And traditionally, spreads move inverse of rates so it's unlikely to get an environment of spreads blowing out 1-3% without rates coming down to offset some of that. 

 

And if you don't like that risk, or are concerned about higher rates AND higher spreads (basically what it'll take to lose from here) then you can take risks in mortgages that are priced like it's 2008 or in treasuries where you don't have the spread. 

 

Point is, it takes A LOT to lose in bonds right now. And if we get those series of unfortunate events, it's going to take A LOT more to lose on them a second year OR for equities to beat them. Because an environment where rates go up 2% and spreads blow out by 2% is NOT an environment where equities are up. 

 

[TwoCitiesCapital]

12 minutes ago, Gregmal said:

For all the bond fanfare, it honestly seems no better or different than stocks in that it’s a pickers market. The arguments so far have been bonds did great “here or there” but it then gets diced up and turns out long bonds did well here but lost 50% last few years. So then it’s short term bonds and notes but then you expand the timeline and those do terrible over the long haul. It’s no different at all than stocks. Buyer beware. The search for a magic cure all within the investor world continues. So far the one winner unfortunately seems to be index trackers and Berkshire. 

 

Yes. As this entire forum implies, it's a pickers market. Otherwise we'd all just buy the 60/40 portfolio and not talk about anything. 

 

Bonds are priced attractively. Equities not so much. The history thing has really only come up when the equity bulls say "stocks ALWAYS outperform bonds" or "stocks are inflation hedges" or "stocks are the only suitable long term investment" because all of those statements have been proven false by one segment of the bond market or another for extended periods of time. 

[james22]

WFC-L at $1,074 today (pays $75/share/year) for a 7% yield,

BAC-L at $1,070 (pays $72.50) for 6.8%.

 

https://www.philosophicaleconomics.com/2017/03/a-value-opportunity-in-preferred-stocks/

[EBITDAg]

1 minute ago, james22 said:

WFC-L at $1,074 today (pays $75/share/year) for a 7% yield,

BAC-L at $1,070 (pays $72.50) for 6.8%.

 

https://www.philosophicaleconomics.com/2017/03/a-value-opportunity-in-preferred-stocks/

I've also been adding small amounts over the past few days.

[UK]

13 hours ago, TwoCitiesCapital said:

The history thing has really only come up when the equity bulls say "stocks ALWAYS outperform bonds" or "stocks are inflation hedges" or "stocks are the only suitable long term investment" because all of those statements have been proven false by one segment of the bond market or another for extended periods of time. 

 

I guess I still just do not understand how are equities not outperforming bonds (and other stuff) over really extended periods of time. If you time them or choose one segment over another right, sure you will outperform. But than, you can also do this with equities? But if you were to pick snp500 vs some aggregate bond fund today for the next 10 or 20 years, what would be your choice?

 

Just some random google links:

https://people.duke.edu/~charvey/Classes/ba350/history/history.htm

https://viniyogindia.com/public/stocks-for-the-long-run-an-indian-perspective/

https://awealthofcommonsense.com/2021/05/200-years-of-asset-class-returns/

 

Edited October 5, 2023 by UK

[UK]

Speaking of premiums:

 

https://www.wsj.com/finance/investing/why-8-percent-mortgage-rates-arent-crazy-590d887f

 

This nearly three percentage-point gap is big. The prepandemic average from 2017 to 2019 was under two points, according to ICE data. It has narrowed slightly from earlier this year, when mortgage-bond portfolios of distressed banks were being sold off. Still, that raises the possibility that even without more failures, banks moving just to trim their portfolios to raise cash could help keep that gap about where it is—effectively turning just a 5% 10-year Treasury yield into an 8% mortgage rate.

...

However, a more settled path of Fed monetary policy that tamps down volatility could bring in more buyers of mortgage bonds, whose high yields make them competitive with riskier instruments like corporate bonds and, in theory, quite attractive. Longer-duration investments such as mortgage bonds are risky in a rising-rate environment, so once investors get comfortable that rates have peaked, investors could get interested. “Once there is clarity from the Fed, mortgage spreads should tighten,” says Jeana Curro, head of agency MBS strategy at Bank of America. “Those on the sidelines could get involved again,” a group that includes overseas buyers.

 

Edited October 5, 2023 by UK