Bonds!

[thepupil]

11 minutes ago, Dinar said:

@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

yea, above example assumes one cannot (I've had years where it's made sense and years where it hasn't). if you can then 

 

tsy yield  4.8%, 3.0% after tax

mgn rate 6.3%, 3.96% after tax

-96 bps of carry

 

on 30% of your portfolio you're losing ~1%/yr, only 30 bps / yr of negative carry to the whole portfolio to own some punchy recession/deflation hedges that will make you a good bit if LT rates go down. 

[tede02]

@thepupil You've got more guts than me. I've grabbed a little bit of 10-year notes and some 5-10 TIPS when yields have popped. But keeping it small dollar. I grabbed some 2-year today at over 5% YTM. 

[thepupil]

1 minute ago, tede02 said:

@thepupil You've got more guts than me. I've grabbed a little bit of 10-year notes and some 5-10 TIPS when yields have popped. But keeping it small dollar. I grabbed some 2-year today at over 5% YTM. 

 

it's small for me too. 

 

here's my 401k, was it "gutsy" to just be buying bonds instead of bills/stocks as they made 0% while i contributed to this thing which is not a huge % of my NW?...at beginning of thread i said, "time to start building and I'll be way too early and wrong". so far I've been right on being wrong lol. 

 

the below is just boring, rather than gutsy...just buying something where it's really hard to lose nominal $$$'s on as rates rise because you just keep re-investing at higher rates and duration keeps dropping as your coupons get fatter. 

 

is it gutsy to have recently bought like 10% on mgn in 20-30 yrs outside of this account over the last week or 2? 

 

I really don't think its gutsy at all. the downside is really easy to think about/model (outside weimar like debasement*) and i actually think portfolio is incrementally safer layering in a little duration. maybe that makes me a baggie risk parity bro...

 

gutsy would be going full risk parity bro and having like 100% stocks 100% of account in LT bonds. gutsy would be getting long millions of 30 yr futs.

 

I'm not gutsy. I'm just trying to survive/ be ready for a variety of environments. to that end, I think  that 4 / 5 / 6 handles on safe no default bonds demands an allocation >0%, whereas 2011-2022, for me at least, 0% was the right bond allocation. 

 

*which is why we have 2 jobs, a mortgage that exceeds all my nominal bonds, and the other 80-90% of the portfolio. 

 

but so far wrong, underperformed t-bills, should have waited two years to start. alas, I'm not good at timing. 

 

 

[thowed]

16 minutes ago, thepupil said:

alas, I'm not good at timing. 

 

I beg to differ - I remember you posting about buying BSM and DMLP in 2020, which was pretty great timing. 

 

Am very grateful, as it got me looking into them (I timed it less well, but acceptably), and I now have decent DMLP position (I couldn't get as comfortable with BSM management-wise & don't understand gas as well).

 

Sorry to go off-thread.

[thepupil]

haha, strangely, despite having little knowledge in the sector, my timing and IRR on energy investments has been excellent over the years. mainly a bit of contrarianism and, because of lack of knowledge, a focus on lower debt/high quality co's that were around for upcycle. 

[fareastwarriors]

@thepupil

 

you're still holding a CLO etf? 

Any color to share?

[thepupil]

14 minutes ago, fareastwarriors said:

@thepupil

 

you're still holding a CLO etf? 

Any color to share?

 

regardless of whether i hold any, I think the CLO AAA ETF's are a great way to make a decent pre-tax return without taking duration risk, but with taking some incremental mark to market risk and credit relative to t-bills. it's pretty simple, you make SOFR + 100 -150 (5.3% +100-150 =6.3-6.8%), SEC yield on JAAA is 6.7% and you're betting on CLO's having <40% ish cumulative loss from defaults (which won't happen unless, to quote Jamie Dimon, the earth hits the moon). for a portion of someone who wants something safe, but wants to make more than bills, seems pretty good to me. 

[TwoCitiesCapital]

3 hours ago, thepupil said:

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. 

 

 

Same. I don't think I've seen a more favorable set-up for fixed income in my adult life. 

 

Yields significantly in excess of both GDP and inflation?!?!?! High single digit returns available without taking much, if any, credit risk?!?!? With a little leverage, spread, and/or illiquidity premium, you can easily get 8-12%. 

 

401K is entirely in core bond and intermediate treasuries funds. All of my short-term fixed income products have been sold and rolled into intermediate/long treasuries, agency MBS exposure, OR fixed income CEFs utilizing spread/leverage and discounts to NAV. Betting on a move in rates sooner rather than later. 

 

 

[CorpRaider]

I just decided to apply a moving average price rule to my intermediate term treasury allocation, across relevant tax advantaged accounts, whenever the term premium (or whatever the proper name for the spread over bills is) is in the bottom 50% of historical observations, (i.e., when duration risk is historically expensive).  So, I sold down my bonds.  You guys will probably be right.

Edited April 27 by CorpRaider

[mattee2264]

I'm not really seeing the appeal of intermediate or long bonds right now unless you are anticipating some kind of deflationary bust. But in that scenario long duration stocks such as Big Tech and bond proxies probably do a lot better. 

 

In a "higher for longer" scenario real returns will approximate zero in bonds and if the yield curve un-inverts the way it should then you could end up with unrealised losses until your bond matures.

 

Equities generally do pretty well in a moderate inflation environment especially as it usually goes together with healthy economic growth. They can increase prices and volumes and that makes for very healthy nominal earnings growth. Many people thought the end of ZIRP would lead to multiple compression. But it hasn't in a meaningful way.

 

And if inflation accelerates and interest rates need to go higher....well just think what happened to TLT in 2022 falling 50%. 

[Dinar]

Actually, I think 25-30 year TIPS with 2.4-2.5% real yield are a no-brainer here for non-taxable and tax-deferred accounts, assuming inflation will get measured properly.  

[thepupil]

2 hours ago, Dinar said:

Actually, I think 25-30 year TIPS with 2.4-2.5% real yield are a no-brainer here for non-taxable and tax-deferred accounts, assuming inflation will get measured properly.  

agreed, have some for my parents IRA.

[thepupil]

2 hours ago, mattee2264 said:

I'm not really seeing the appeal of intermediate or long bonds right now unless you are anticipating some kind of deflationary bust. But in that scenario long duration stocks such as Big Tech and bond proxies probably do a lot better. 

 

In a "higher for longer" scenario real returns will approximate zero in bonds and if the yield curve un-inverts the way it should then you could end up with unrealised losses until your bond matures.

 

Equities generally do pretty well in a moderate inflation environment especially as it usually goes together with healthy economic growth. They can increase prices and volumes and that makes for very healthy nominal earnings growth. Many people thought the end of ZIRP would lead to multiple compression. But it hasn't in a meaningful way.

 

And if inflation accelerates and interest rates need to go higher....well just think what happened to TLT in 2022 falling 50%. 

Nothing is without risk and things that we can't contemplate can happen, but for the on the run 30 year bond to fall 50% in price, yields would have to go to 9.9%. duration risk is dynamic and has changed drastically since the 30 yr yielded 1.2%. as rates move up, duration risk decreases (modified duration of 30 yr bond is now like 16)

Edited April 27 by thepupil

[TwoCitiesCapital]

4 minutes ago, thepupil said:

Nothing is without risk and things that we can't contemplate can happen, but for the on the run 30 year bond to fall 50% in price, yields would have to go to 9.9%. duration risk is dynamic and has changed drastically since the 30 yr yielded 1.2%. as rates move up, duration risk decreases (modified duration of 30 yr bond is now like 16)

 

I think this is what people are missing. Long bonds were a terrible investment in 2021. They're significantly better today and the risk/reward is skewed to the upside IMO. 

 

Even if inflation accelerates, it'd have to go up quite a bit for 30-year mortgages to be a bad bet. You'd likely lose some on the 20 year treasuries, but reinvesting coupons at rates of 5+% on discount bonds isn't a bad way to go IMO even if you show unrealized losses for the first 1-3 years. 

 

2 hours ago, mattee2264 said:

I'm not really seeing the appeal of intermediate or long bonds right now unless you are anticipating some kind of deflationary bust. But in that scenario long duration stocks such as Big Tech and bond proxies probably do a lot better. 

 

I disagree. 2022 returns were abysmal for big tech as inflation was accelerating. 

 

Meta was down ~65%. 

Apple was down ~27%. 

Google was down ~40%. 

Microsoft was down ~30%. 

Nvidia was down ~50%. 

 

They only turned around once it was clear inflation was abating. Intermediate bonds stomped big tech in 2022. Short term bonds even more so. This is why I keep repeating ad nauseum - stocks are NOT an inflation hedge. They do miserably when inflation is elevated and/or erratic. They do well when its consistent and low. 

 

2 hours ago, mattee2264 said:

 

In a "higher for longer" scenario real returns will approximate zero in bonds and if the yield curve un-inverts the way it should then you could end up with unrealised losses until your bond matures.

 

I don't disagree that real returns for bonds will likely be close to zero over a 10-20 year type time frame. But I expect that they will be significantly positive in the intermediate term. 

 

2 hours ago, mattee2264 said:

Equities generally do pretty well in a moderate inflation environment especially as it usually goes together with healthy economic growth. They can increase prices and volumes and that makes for very healthy nominal earnings growth. Many people thought the end of ZIRP would lead to multiple compression. But it hasn't in a meaningful way.

 

This hasn't really played out though.  

 

Margins fell pretty quickly in 2022. Companies cannot raise prices as quickly their input costs are rising so margins get compressed at the front end of inflation acceleration. Then, you also have consumers that cut back, or substitute cheaper options, meaning that higher prices often lead to lower volumes and you're still behind. This is precisely why corporate earnings fell in 2022. After 2-years of moderating inflation, rising prices, and etc - corporations have only barely made it back to 2021 in nominal terms but are still significantly negative in real terms. 

 

Equities did better than bonds over the whole cycle, but underperformed dramatically on the front of it - even with bonds starting from a historic bubble. What happens if we accelerate again? And bonds aren't in a historic bubble? They probably outperform again - and even more dramatically this time. 

[Gregmal]

Think we ve had this subject come up before, but using one flimsy, kind of subjectively picked argument based on a timeline of “in 2022” doesn’t even remotely cover “how stocks do with inflation”. Inflation started summer/fall 2020(hence how we starting printing it on the CPI in Q2 2021) and there’s still modest albeit abating inflation. Saying “in 2022 they couldn’t raise prices fast enough to counter inflation” completely ignores the multi year runway they get for raising prices following it. Or the huge demand and profit boost most got from the wave of inflation producing demand. Especially when most inputs were supply chain. Fritos aren’t 150% more expensive to produce than they were in 2019. But the price hikes stay. 
 

And then also “the returns aren’t positive in real terms”…why cherry pick the absolute peak? 
 

It should be very obvious stocks are dynamic, flexible to environment because they have actual operators managing them, and have more than held their own through the 2020-2024 inflation period. They’re also tax efficient. Flipping through CDs and short term crap isn’t. The obviousness of the advantage is even more evident by the fact that we have to contain the counter argument to “if we take the date the index hit its exact top and then stop counting at the bottom, it’s clear stocks do poorly with inflation”…frankly I don’t think it’s really productive to force oneself to draw conclusions based on just 12 months, but nevertheless nowadays we seeing people doing it for mere days, weeks and months. That’s not “in an inflationary environment” and it’s not “evidence” really of anything other than a bunch of monkeys playing hot potato based on headlines.

[ValueMaven]

Have been buying the $1,000 GS Preferred's with a coupon of 7.5% !!  Currently trading at $101 - so the YTM is 7.3% or so.  Institutional Preferred' so do you dont have idiot ETFs/PFF swinging the prices around.  I view this as 'Cash Plus/Very Low Risk' 

[CorpRaider]

1 hour ago, Gregmal said:

Think we ve had this subject come up before, but using one flimsy, kind of subjectively picked argument based on a timeline of “in 2022” doesn’t even remotely cover “how stocks do with inflation”. Inflation started summer/fall 2020(hence how we starting printing it on the CPI in Q2 2021) and there’s still modest albeit abating inflation. Saying “in 2022 they couldn’t raise prices fast enough to counter inflation” completely ignores the multi year runway they get for raising prices following it. Or the huge demand and profit boost most got from the wave of inflation producing demand. Especially when most inputs were supply chain. Fritos aren’t 150% more expensive to produce than they were in 2019. But the price hikes stay. 
 

And then also “the returns aren’t positive in real terms”…why cherry pick the absolute peak? 
 

It should be very obvious stocks are dynamic, flexible to environment because they have actual operators managing them, and have more than held their own through the 2020-2024 inflation period. They’re also tax efficient. Flipping through CDs and short term crap isn’t. The obviousness of the advantage is even more evident by the fact that we have to contain the counter argument to “if we take the date the index hit its exact top and then stop counting at the bottom, it’s clear stocks do poorly with inflation”…frankly I don’t think it’s really productive to force oneself to draw conclusions based on just 12 months, but nevertheless nowadays we seeing people doing it for mere days, weeks and months. That’s not “in an inflationary environment” and it’s not “evidence” really of anything other than a bunch of monkeys playing hot potato based on headlines.

I agree with this and think you could look at other examples in history to support this assertion.

Edited April 27 by CorpRaider

[Gregmal]

Yup. And then you look at the alternative suggestion which is to own bonds which over the same time period either got smoked, or if shorter duration, “didn’t have a real return” either after all the hatchet job adjustments and modifications to the gross returns based on false CPI data. But then you step back and say ok this is the result you get for stocks when you go super duper out of your way to try to make them look bad, they could easily perform better, which generally they do. Whereas fixed income? You get nothing. At best over the same time period you got the coupon, remember the starting point for stocks was “the top” when fixed income got you 1%, and at worst you got what you ended up with anyway by owning them. Or then we pivot to some super active, day trading type hindsite strategy where we guess the short term fluctuations, and that too, has proven to be both a suckers bet, and way less efficient tax wise, to….just owning stocks. I don’t get the point of this game.

[TwoCitiesCapital]

2 hours ago, Gregmal said:

Think we ve had this subject come up before, but using one flimsy, kind of subjectively picked argument based on a timeline of “in 2022” doesn’t even remotely cover “how stocks do with inflation”.

 

 

Equities also didn't do well in the 70s? Or is that also cherry picking?

Can you show me a period of significant inflation where stocks outperformed both short-term bonds and commodities? 

 

We all agree that stocks are long duration instruments, but suddenly it becomes controversial to say that they have the same problems with inflation and rates ALL other long duration instruments do? 

 

2 hours ago, Gregmal said:

 Saying “in 2022 they couldn’t raise prices fast enough to counter inflation” completely ignores the multi year runway they get for raising prices following it.

 

It wasn't ignored. I acknowledged that so far stocks have done better over the full cycle (entirely from margin expansion). I also acknowledged that after ~3 years of this 'multi year runway' that earnings are nominally flat and still significantly negative in real terms. How is that ignoring it? Do we just need to wait another 3-4 more years to catch back up? 

 

Stocks are a great inflation hedge IF you have ~7 years to wait for them to be?

 

2 hours ago, Gregmal said:

And then also “the returns aren’t positive in real terms”…why cherry pick the absolute peak? 

 

 

The absolute peak for the indices was like November 2021. The absolute peak for most names in the index was summer 2021 (you've even pointed this out before). Using the beginning of 2022 was convenient from a calendar year perspective because 2022 is when inflation really showed up and rate hikes really started. It was a few months/percentage points off the top for both stocks and bonds, but it doesn't look much better if you rewind further back into 2021. 

 

It improves the nominal peak-to-trough drops (for both stock and bonds), but also extends the time in which stock returns underperformed inflation 

 

2 hours ago, Gregmal said:

It should be very obvious stocks are dynamic, flexible to environment because they have actual operators managing them,

 

That hasn't mattered in prior inflations when stocks did very poorly. Why does it suddenly matter now? 

 

Edited April 28 by TwoCitiesCapital

[Gregmal]

1) because it’s not the 70s. There’s nothing comparable to what was happening in the 70s other than just blindly saying “inflation” happened.

2) I agree and thought the top for those not following the index was actually February 2021 when the spacs went first. I just get tired of seeing articles and reading about how “from Q4 2021 this or that” occurred. Or “negative real returns” in a vacuum when it’s like ok we occasionally have periods where everything stinks. It’s how the market works. If we wanna do “real returns”, bonds and cash from 2021 dindu nuffin either. Residential real estate is probably the only thing I’m aware of that’s gone up since 2021. And even there, it’s somewhat area specific although broadly safe to say done better than anything else.
 

End of the day, I agree actually from HERE there’s some optionality in fixed income that is interesting. But I just don’t think it should be an investment philosophy. I get there’s a degree of “other risks” that come if you work in a field sensitive to overall macro, for a second in March 2020 I saw a picture that was infinitely worse than anything I’d ever dreamed up with stocks and real estate. But for the average person, this sort of guessing game is a waste of time and especially brain space. The only people whom should have a sub 5-7 year timeline are either sub 30 and trying to buy a home, or 55+ looking to retire. Everyone else? Just sit on your hands.

[Gregmal]

It’s funny actually thinking about when the top was I recalled @changegonnacomeconfidence termites perspective in q3 2021. And it really played out. The crap went first and the last to fall was the darlings, but that also should’ve been a sign that the turn was near, along with the rate cycle peaking. The turn then happens in reverse, the darlings came back first, then the middle of the road stuff, then the poo, but there’s still a lotta stuff that’s got room to come back and then of course, we need the poo poo and the IPOs to get favorable again. I don’t think we re at any sort of significant top or bottom right now. There’s actually a good amount of value imo, which then leads back to the whole, “what the point of 5-7% in fixed income” and “why not just buy stocks”.

Edited April 28 by Gregmal

[Gregmal]

The most “real” takeaway from 2022 imo wasn’t that inflation tanked stocks, it was already here prior, so that’s not it. It wasn’t rates, as we see now, market is expecting 1/0 rate cuts this year now and we re at 5000+ and we re cool with higher for longer. It was people gambling on a recession. When the recession proved to be just another scream and shout Fintwit product that never became real, markets recovered and volatility tanked. Further validating this was the peak in short interest in June/October 2022 and all those “fund manager surveys” which are great contras.

Edited April 28 by Gregmal

[TwoCitiesCapital]

If the broader market was gambling on a recession, it's doubtful that the long bond would've been down ~30% in 2022. Or that oil would've been up.

 

I think you need to revisit the big picture across ALL asset classes. 

 

Stocks down. Bonds down. Oil up. Gold up.  Yea, that's inflation driving the market. 

[mattee2264]

2022 was an inflation shock. Long duration assets such as tech stocks and long bonds got destroyed. But we avoided a 73-74 scenario because of the pace of the disinflation and the economy holding up a lot better than expected. Yes there were signs of inflation before 2022 but everyone including the Fed assumed it would be transitory and the Fed didn't react. It was when the Fed realized it wasn't transitory and reacted by starting a rate hiking cycle that markets headed south. 

 

I also do not think it is relevant to talk about 2022. It was a shock that resulted from too much stimulus (demand side) before the supply side had the chance to recover fully from COVID. 

 

I think now we are probably in a moderate inflation environment. Ignoring valuations for now stocks tend to do well in such environments because they can usually pass on moderate cost inflation to consumers and grow earnings at a robust rate. 

 

Some bears have valuation concerns believing that equities are still priced for a return to a low interest rate low inflation environment. But outside of Big Tech valuations are probably already there and higher interest rates aren't an issue if they are because economic growth is more robust over the next decade compared to the anaemic growth post-GFC/pre-COVID. And arguably if AI does deliver its promise the rest of the market is undervalued as it will mean higher productivity growth and higher margins. As for Big Tech even if interest rates and inflation remain around 4-5% if they can grow earnings at a double digit rate (and again AI might extend the growth runaway the same way Cloud did) then they also look very reasonably valued if not cheap. 

 

I think the main worry for equities is that AI turns out to be a mirage and the real-world benefits are relatively limited. In this case higher inflation higher interest rates higher tax rates and having to refinance cheap debt will be major headwinds for the average stock. And for tech stocks they will be doubly punished: first, for making unproductive investments and second, when growth slows down in their core businesses and AI revenues fail to pick up the slack. 

 

 

[Intelligent_Investor]

Lots of people use the Nifty fifty bust in the 70s as a cautionary tale of buying great companies too expensive and while its true that the bust was big and took a while to recover from, if you held an equal weighted basket of nifty fifty stocks bought the day before the crash and held for the next 45-50 years you would have outperformed every index by a large margin. In the end the truly great companies in the nifty fifty were what made a difference over time, when you have companies that can compound capital at high teens for decades its very very hard to pay too high a price just due to the math of compound growth.