Bonds!

[lnofeisone]

I agree with you. Something feels off but I can't find what and quick googling yielded nothing. 

[tede02]

AGG is now up over 6% YTD. Amazing considering where things were at the end of October. 

 

I also find it amusing that there were a lot of prominent money managers saying, "We're in a new era of higher inflation, higher interest rates, etc." It reminds me of the 2011-2012 timeframe when a lot of the same type of people were saying the Fed's QE policies were going to cause massive inflation. That turned out to be dead wrong. The inflation and rate story presently still has a ways to go, but I won't be surprised if we see a repeat in the sense that these guys that have been saying high rates are here to stay turn out to be completly wrong. 

[Gregmal]

Yea this decade's(actually now well into 2 decades LOL) biggest bums have been the "money printing bubble" conspiracy theorists. 

[mattee2264]

What people got wrong is the type of inflation. QE policies led to asset inflation. Not consumer price inflation.

It was also a bit naive to think that the Fed would ever make any serious attempt to reduce its balance sheet and do QT in a meaningful way. 

 

Higher for longer is probably wrong. The global economy is weak and now the pandemic stimulus is wearing off there goes all the demand pull inflationary pressure. The supply side inflation was always going to be transitory. Longer term probably there will be less efficient supply chains, deglobalization to some extent and resource shortages. But because they are supply side what will eventually happen I think is that central banks will just come to accept 3-4% average inflation. 

 

The slowdown this year will get inflation back to 2% and allow the central banks to declare a win. And then if inflation drifts up when the economy recovers there will be some half hearted attempts to bring it down and eventually a new inflation target will probably be adopted or the concept of "average inflation targeting" will be made more popular. 

[Red Lion]

9 hours ago, mattee2264 said:

What people got wrong is the type of inflation. QE policies led to asset inflation. Not consumer price inflation.

It was also a bit naive to think that the Fed would ever make any serious attempt to reduce its balance sheet and do QT in a meaningful way. 

 

Higher for longer is probably wrong. The global economy is weak and now the pandemic stimulus is wearing off there goes all the demand pull inflationary pressure. The supply side inflation was always going to be transitory. Longer term probably there will be less efficient supply chains, deglobalization to some extent and resource shortages. But because they are supply side what will eventually happen I think is that central banks will just come to accept 3-4% average inflation. 

 

The slowdown this year will get inflation back to 2% and allow the central banks to declare a win. And then if inflation drifts up when the economy recovers there will be some half hearted attempts to bring it down and eventually a new inflation target will probably be adopted or the concept of "average inflation targeting" will be made more popular. 

This prediction seems spot on to me on every level. 

[ValueArb]

Leverage makes heroes and zeros. From Bloomberg

 

Quote

 

Macro trader Said Haidar’s clients suffered a dramatic reversal of fortunes last year as his leveraged bond market bets imploded. 

His Haidar Jupiter fund slumped 43.5%, posting the biggest annual loss since it started trading more than two decades ago, according to an investor letter seen by Bloomberg News. The decline, which follows a record 193% surge just a year before, has forced Haidar to make sweeping changes to his portfolio.

 

 

[Gregmal]

12 minutes ago, ValueArb said:

Leverage makes heroes and zeros. From Bloomberg

 

 

Nice, so another macro asshole who didnt know when to stop gambling on Twitter conspiracies... 

[lnofeisone]

On 12/22/2023 at 7:35 PM, Dinar said:

I would bet a nice bottle of champagne that you are NOT correct.  Call the IRS or your accountant or tax lawyer or find a relevant passage of the tax code.  

It took a hot minute, but I made a few calls to IRS-savvy individuals.

 

1) They were equally perplexed at not running into this situation. Our current hypothesis is that none of us have encountered this because we have never had a material interest rate increase + investment in munis at the same time.

2) Onto more interesting tidbit. Original Issue Discount (that's the language IRS calls this) is not included in income if the bond is a tax-exempt obligation. That means that de minmus rule generally does not apply to tax-exempt obligations. Page 6 of the https://www.irs.gov/pub/irs-pdf/p1212.pdf section on "including OID in income" and "De minimis rule" sections provide two very explicit rules on excluding this income. 

 

So the opportunity is - buy munis that re below de minimus and, if you hold to maturity, all the gains are tax free.

 

@Dinar - I appreciate your skepticism and would love if you took a look. 

 

I bought a bunch of zero munis that are below this de minimus and will wait to see if TD Ameritrade will send the 1099-OID this year.  

 

 

[Dinar]

1 hour ago, lnofeisone said:

It took a hot minute, but I made a few calls to IRS-savvy individuals.

 

1) They were equally perplexed at not running into this situation. Our current hypothesis is that none of us have encountered this because we have never had a material interest rate increase + investment in munis at the same time.

2) Onto more interesting tidbit. Original Issue Discount (that's the language IRS calls this) is not included in income if the bond is a tax-exempt obligation. That means that de minmus rule generally does not apply to tax-exempt obligations. Page 6 of the https://www.irs.gov/pub/irs-pdf/p1212.pdf section on "including OID in income" and "De minimis rule" sections provide two very explicit rules on excluding this income. 

 

So the opportunity is - buy munis that re below de minimus and, if you hold to maturity, all the gains are tax free.

 

@Dinar - I appreciate your skepticism and would love if you took a look. 

 

I bought a bunch of zero munis that are below this de minimus and will wait to see if TD Ameritrade will send the 1099-OID this year.  

 

 

https://www.schwab.com/learn/story/beware-taxes-on-discounted-munis

[lnofeisone]

14 minutes ago, Dinar said:

https://www.schwab.com/learn/story/beware-taxes-on-discounted-munis

Thanks for this.

 

1) He validates half my research that if you buy at a discount at issue (that's the nuance), that extra income is tax-free.

 

2) Where he invalidated my hypothesis is the secondary market bond purchase. Buying bonds in the secondary triggers issues that would be consistent with other bonds. I found relevant IRS passage that speaks to this (https://www.irs.gov/publications/p550#en_US_2022_publink100010016 - go to Market Discount Bonds). 

 

You still get quirk on 30 years out muni zeros. For example: 30 years out, 1000 par, issued at $250 can be bought for $175 ($250-30*0.0025*1000) before triggering any tax issues. In other words, $75 allowance has more mileage on a $250 (30%) price than it would on $950 (8%) bond. 

[Gmthebeau]

On 12/20/2023 at 10:12 AM, Gmthebeau said:

Everyone and their dog saying lock in long term rates here at 4%, but virtually nobody saying it at 5%.  Rest assured the crowd always wrong, and we will likely see persistent inflation and despite Jerome salivating to cut rates, the 30 year will likely re-approach 5% sometime in 2024.

 

and here we go again.   Everyone who bought the 4% being blown up.

[thepupil]

7 minutes ago, Gmthebeau said:

 

and here we go again.   Everyone who bought the 4% being blown up.

 

lol, BND is at $71.80. It peaked recently at $73.5, after which it paid $0.2. so it's down about 2% in terms of total return from recent peak.  $TLT is 7% off peak, less a little coupon. 

 

For something with a little more duration I have some Caltech 2119 bonds that I bought at $58 in October, think they got to $72, and are now at $68. 

 

In what world is that blowing up?

 

a bit dramatic

 

 

[Gmthebeau]

54 minutes ago, thepupil said:

 

lol, BND is at $71.80. It peaked recently at $73.5, after which it paid $0.2. so it's down about 2% in terms of total return from recent peak.  $TLT is 7% off peak, less a little coupon. 

 

For something with a little more duration I have some Caltech 2119 bonds that I bought at $58 in October, think they got to $72, and are now at $68. 

 

In what world is that blowing up?

 

a bit dramatic

 

 

 

Well maybe, and if you hold them you will get the coupon.  It just wasn't a good time to be buying bonds IMO when the 10 year was 4% and less.  I don't know if J Pow intentionally tries to mislead the market or is just that incompetent, or can't communicate, but he is a disaster every time he speaks.

[gfp]

With age, Mr. Thebeau, you will gain some humility and realize that you are not all knowing in all things and that everybody else around you are not entirely clueless idiots.  In most of your posts on this message board, you have an absolutist, I told you so attitude that suggests youth and inexperience.  The combative, unpleasant tone of your posts does nothing to help the collegial atmosphere we have developed here over decades.  Take it easy and enjoy the ride.

 

(and no, as you are about to suggest, I am not long a bunch of bonds at 4% and getting blown up.  nor do I own paramount or xyz losing investment you so wisely called)

[TwoCitiesCapital]

1 hour ago, Gmthebeau said:

 

and here we go again.   Everyone who bought the 4% being blown up.

 

If long-term, rates go from 4% to 5.5%, which do you think will likely lose more? Stocks or bonds? 

[Gmthebeau]

16 minutes ago, TwoCitiesCapital said:

 

If long-term, rates go from 4% to 5.5%, which do you think will likely lose more? Stocks or bonds? 

Stocks.  I still think there is say a 25% chance the FED will be forced to raise rates even higher.

[Gregmal]

Lol I remember being told we were all idiots for not having massive Tesla and Moderna positions in November 2021…then having our friend totally disappear and return a couple years later accusing me of being long SF real estate….and claiming he was retired and in bonds. Only to then switch bonds to cash when he was told bonds did poorly. And now he’s long Uber and Chinese tech stocks….

[Gmthebeau]

1 hour ago, Gregmal said:

Lol I remember being told we were all idiots for not having massive Tesla and Moderna positions in November 2021…then having our friend totally disappear and return a couple years later accusing me of being long SF real estate….and claiming he was retired and in bonds. Only to then switch bonds to cash when he was told bonds did poorly. And now he’s long Uber and Chinese tech stocks….

 

You were bullish on SF real estate.  Own it.  I am retired, and I trade a lot.  Own, stocks, bonds, cash.  Sorry for not updating you daily on all my trades.  I put some out yesterday and got push back that going long Chinese stocks was not contrarian.  That has to be the dumbest thing I read on here in a long list.  I am a bit of loss for how some guys on here view things and have to think they been blown to shit from their holdings.  Good luck.

Edited February 16 by Gmthebeau

[Gmthebeau]

1 hour ago, TwoCitiesCapital said:

 

If long-term, rates go from 4% to 5.5%, which do you think will likely lose more? Stocks or bonds? 

 

I like floating rate a lot better in the bond area.  You can get 8% and FED stuck having to stay higher for longer despite Powell wanting to cut.  The folks on the committee with some common sense won't let him.   

[TwoCitiesCapital]

2 hours ago, Gmthebeau said:

Stocks.  I still think there is say a 25% chance the FED will be forced to raise rates even higher.

 

I'm open to the Fed hiking again. I think it would be a mistake. I don't think the data will support it especially now that we're seeing outright deflation in many goods/real assets. But I can believe that their motivations may be something other than "stable employment and inflation".

 

Powell has basically said, in other words, that their intention is to drive the economy into a recession. Whether he does that by raising rates, or leaving them too high for too long, I can't say. But I've been pretty confident for awhile that 4% was too high and have been buying duration every time its available above 4%.  

 

37 minutes ago, Gmthebeau said:

 

I like floating rate a lot better in the bond area.  You can get 8% and FED stuck having to stay higher for longer despite Powell wanting to cut.  The folks on the committee with some common sense won't let him.   

 

I'm in a lot of things in fixed income at the moment. Started off in cash and iBonds when rates were basically zero in late 2021. Then started accumulating short-term spread products and agency mortgage expopsure as rates rose and certain spreads blew out in 2022. Then started adding intermediate government duration and core bond type products. Then I started adding TLT calls when rates were on their way up to 5%. In recent months I was adding fixed income CEFs at sufficient discounts to NAV to make me want the low-quality credit.  10+% cash yields. 

 

At this point, I don't really care what rates do. Lower rates benefits my duration exposures and can give me ~10+% while likely giving me attractive opportunities in stocks. Flat rates let me collect a yield that probably YTMs that are 6-7% in aggregate. Higher rates hurts my duration, but likely help my spread products - so maybe ~5+% while setting me up for even juicier returns next year. 

 

I'm ok with any of those scenarios. 

Edited February 16 by TwoCitiesCapital

[Gmthebeau]

8 minutes ago, TwoCitiesCapital said:

 

I'm open to the Fed hiking again. I think it would be a mistake. I don't think the data will support it especially now that we're seeing outright deflation in many goods/real assets. But I can believe that their motivations may be something other than "stable employment and inflation".

 

Powell has basically said, in other words, that their intention is to drive the economy into a recession. Whether he does that by raising rates, or leaving them too high for too long, I can't say. But I've been pretty confident for awhile that 4% was too high and have been buying duration every time its available above 4%.  

 

 

I'm in a lot of things in fixed income at the moment. Started off in cash and iBonds when rates were basically zero in late 2021. Then started accumulating short-term spread products and agency mortgage expopsure as rates rose and certain spreads blew out in 2022. Then started adding intermediate government duration and core bond type products. Then I started adding TLT calls when rates were on their way up to 5%. In recent months I was adding fixed income CEFs at sufficient discounts to NAV to make me want the low-quality credit.  10+% cash yields. 

 

At this point, I don't really care what rates do. Lower rates benefits my duration exposures and can give me ~10+% while likely giving me attractive opportunities in stocks. Flat rates let me collect a yield that probably YTMs that are 6-7% in aggregate. Higher rates hurts my duration, but likely help my spread products - so maybe ~5+% while setting me up for even juicier returns next year. 

 

I'm ok with any of those scenarios. 

 

The FED typically leaves rates to high to long, but I still don't see a lot of evidence they are really that restrictive.   Inflation came down rapidly but has pretty much gotten stuck, and I think there is a lot of evidence to suggest it will pick back up.  Unless the employment market cracks consumers just keep spending.

 

I add duration at 4.4% and above, but I don't think the risk/reward is great below that area.   Of course if you hold till duration it doesn't matter.   I have a similar structure and return profile in fixed income as you.

 

[james22]

On 2/16/2024 at 9:43 AM, Gmthebeau said:

I still think there is say a 25% chance the FED will be forced to raise rates even higher.

 

In an election year?

[Gmthebeau]

12 hours ago, james22 said:

 

In an election year?

I'm sure they don't want to but if inflation picks back up they will get forced to, but again this is just a lower probability.   

[thepupil]

2 years later after start of thread and bonds have underperformed t-bills by 4%/yr and SPY by 8%/yr as the index's yield has increased from 3.5% to 5.25% (actually yields more since that's YTW and MBS will yield more than their YTW)

 

I'm continuing to plow the entirety of my 401k into bonds and have recently started to buy long term tsy's on margin in my taxable (having sold most of my IG corporates after the late 2023 rally). 

 

credit risk free MBS >6%, LT tsy's approaching 5%. good stuff. I'm a buyer. no corporates. IG spreads way too low in my opinion. 

 

not for everyone but if you buy say 30% in LT tsy's at 4.8% on margin at interactive brokers, at top federal tax rate, you're making 3% after tax yield, fund w/ 6.2% margin and you have negative carry of 3% on 30% of your portfolio. At constant yields you lose 90 bps/yr on the portfolio. But in a recession where rates drop just 1%, you get 30% of your portfolio going up 20%, 2% =42% for 600 - 1200 bps of PnL when you want it most from liquid monetizable instrument. if rates go up another % you lose 15% on your 30% / -450 bps. almost no mgn requirement. 

 

JPow is making bonds great again. 

 

[Dinar]

@thepupil just make sure that you can deduct margin interest on your tax return.  I got hit with that last year, got the deduction on the federal level but did not get on the state level.  Painful in a place like NYC