Bonds!

[gfp]

It's time for another edition of "can the 2 year hold with a 5-handle for more than a day or two?!"  My argument for some time has been that there is a wall of buyers at 5%.

 

https://www.cnbc.com/quotes/US2Y

https://www.cnbc.com/bonds/

[Blake Hampton]

Berkshire has essentially no money in long-term bonds, with the little that he does being primarily in foreign governments.

 

 

Edited June 22 by blakehampton

[gfp]

So most of those foreign government bonds are regulatory capital for writing insurance business in those jurisdictions - it used to be primarily in General Re but I'm sure BHSI has plenty of global business as well.  I don't think he has much of a choice so even when German yields (as one example) are tiny he still has to own some of it.  As you can see, the duration is usually pretty short.

 

The Fannie and Freddie agency stuff Berkshire holds is almost entirely from purchases in 2007.  It is just the tag end of un-refinanced mortgages from way back.

 

Most of the corporate bonds they own were purchased in 2002 or 2003.  They own Kinder Morgan Inc bonds they bought in Q1 2003 for 53-57 cents on the dollar - 2030-2032 maturities.

 

They own Williams Companies bonds they purchased in 2002 at 42 cents on the dollar, also 2031 maturity.  Huge yields.

 

They still show Washington Mutual bonds on their books that appear to have defaulted, written down to zero, purchased in 2008-2009.

 

 

Berkshire does own a little more in corporate bonds than it appears on their SEC filings because Berkshire's insurance companies invest in the public bonds of some of Berkshire's subsidiaries.  National Indemnity owns Lubrizol, BNSF and BHE bonds as investments - but these are eliminated in consolidation on BRK's SEC filings.  I guess Warren has a hunch they are good for it.

[Blake Hampton]

6 minutes ago, gfp said:

So most of those foreign government bonds are regulatory capital for writing insurance business in those jurisdictions - it used to be primarily in General Re but I'm sure BHSI has plenty of global business as well.  I don't think he has much of a choice so even when German yields (as one example) are tiny he still has to own some of it.  As you can see, the duration is usually pretty short.

 

The Fannie and Freddie agency stuff Berkshire holds is almost entirely from purchases in 2007.  It is just the tag end of un-refinanced mortgages from way back.

 

Most of the corporate bonds they own were purchased in 2002 or 2003.  They own Kinder Morgan Inc bonds they bought in Q1 2003 for 53-57 cents on the dollar - 2030-2032 maturities.

 

They own Williams Companies bonds they purchased in 2002 at 42 cents on the dollar, also 2031 maturity.  Huge yields.

 

They still show Washington Mutual bonds on their books that appear to have defaulted, written down to zero, purchased in 2008-2009.

 

 

Berkshire does own a little more in corporate bonds than it appears on their SEC filings because Berkshire's insurance companies invest in the public bonds of some of Berkshire's subsidiaries.  National Indemnity owns Lubrizol, BNSF and BHE bonds as investments - but these are eliminated in consolidation on BRK's SEC filings.  I guess Warren has a hunch they are good for it.

 

What do you think about his overall allocation between equities / bonds / cash?

[tede02]

The gradual downward trend in inflation continues. Gets me thinking about nominal treasuries vs. TIPS. 4.5% may be a very good rate looking back in a year. But I also worry about long yields spiking up as the current tax law is set to expire at the end of 2025. The budget deficit is huge and the debt is growing a lot. If the current tax regime is left in-place (assuming no spending reductions), market backlash is a real possibility. Long-story short, I'm sticking with 2-3 year maturies as some of my buys in recent years mature. 

[Parsad]

https://www.cnn.com/2024/07/02/economy/global-debt-crisis/index.html

 

Cheers!

[hasilp89]

 

16 hours ago, Parsad said:

https://www.cnn.com/2024/07/02/economy/global-debt-crisis/index.html

 

Cheers!

 

Powell has commented on US deficit a few times this year.

 

https://www.ft.com/content/bb4fb36e-9669-408f-8b73-7091fbb6fae0

 

https://www.pgpf.org/blog/2024/02/fed-chair-powell-its-past-time-to-address-our-national-debt

 

 

 

Buffett's view is higher taxes. (2024 AGM) 

 

"And one thing that may surprise you, but we… Almost everybody I know pays a lot more attention to not paying taxes, and I think they should. We don’t mind paying taxes at Berkshire, and we are paying a 21% federal rate on the gains we’re taking in Apple. And that rate was 35% not that long ago, and it’s been 52% in the past when I’ve been operating. And the government owns… The federal government owns a part of the earnings of the business we make. They don’t own the assets, but they own a percentage of the earnings, and they can change that percentage any year.

And the percentage that they’ve decreed currently is 21%. And I would say, with the present fiscal policies, I think that something has to give, and I think that higher taxes are quite likely, and if the government wants to take a greater share of your income, or mine or Berkshire’s, they can do it. And they may decide that someday they don’t want the fiscal deficit to be this large, because that has some important consequences, and they may not want to decrease spending a lot, and they may decide they’ll take a larger percentage of what we earn, and we’ll pay it."

 

 

[Blake Hampton]

2 hours ago, hasilp89 said:

 

 

Powell has commented on US deficit a few times this year.

 

https://www.ft.com/content/bb4fb36e-9669-408f-8b73-7091fbb6fae0

 

https://www.pgpf.org/blog/2024/02/fed-chair-powell-its-past-time-to-address-our-national-debt

 

 

 

Buffett's view is higher taxes. (2024 AGM) 

 

"And one thing that may surprise you, but we… Almost everybody I know pays a lot more attention to not paying taxes, and I think they should. We don’t mind paying taxes at Berkshire, and we are paying a 21% federal rate on the gains we’re taking in Apple. And that rate was 35% not that long ago, and it’s been 52% in the past when I’ve been operating. And the government owns… The federal government owns a part of the earnings of the business we make. They don’t own the assets, but they own a percentage of the earnings, and they can change that percentage any year.

And the percentage that they’ve decreed currently is 21%. And I would say, with the present fiscal policies, I think that something has to give, and I think that higher taxes are quite likely, and if the government wants to take a greater share of your income, or mine or Berkshire’s, they can do it. And they may decide that someday they don’t want the fiscal deficit to be this large, because that has some important consequences, and they may not want to decrease spending a lot, and they may decide they’ll take a larger percentage of what we earn, and we’ll pay it."

 

 

This could certainly be the situation if Biden is re-elected. If Trump becomes president however, companies will soon have a negative tax rate and actually receive tax revenue from the government.

[mattee2264]

It is a stupid situation really. Interest rates could be a lot lower if the US government showed even a modicum of fiscal restraint. And that would in turn make US government debt a lot easier to service. And then you would have a chance of growing nominal GDP faster than national debt so that US government debt as a percentage of GDP would decline over the next decades instead of spiralling out of control.

 

Of course for markets it doesn't matter.....until it does. 

 

 

[Gregmal]

Interest rates should be lower and the rest of the world is already headed there. Powell has been a totally lost and confused POS the whole time. He has everything he needs to cut and yet cant seem to do anything so he keeps reverting to this "needs more confidence" copout. We've had like 20+ months of straight declines. No real evidence of continued inflation despite some loudmouthed wailing because for a month or two it wasnt "straight down"...yet, "we need to see more progress" LOL.

 

He has consistently, despite "wanting to see more evidence", ignored the evidence and changed his "metric" to continue perpetuating a story of "persistent and sticky" inflation. He's totally bungled the housing related data, over emphasized abstract academic theories like wage/price spirals, and focused on lagging or unrelated data. Cant wait til he's fired. 

Edited July 5 by Gregmal

[Ulti]

Howard Marks sees the Fed fund rate eventually settling at 3-3.5%… transcript on Apple
https://podcasts.apple.com/us/podcast/the-memo-by-howard-marks/id1521551570?i=1000660868145

[tede02]

Think peak yields are in the rear-view mirror? One thing I think about is long yields increasing if Trump wins in November. I think there is no chance for fiscal restraint unless the markets force it. Would be interesting to see the turbulence if the 10-year shot past 5%. All the randomness and unpredictable events of the world never cease to amuse me. 

[Dinar]

5 hours ago, tede02 said:

Think peak yields are in the rear-view mirror? One thing I think about is long yields increasing if Trump wins in November. I think there is no chance for fiscal restraint unless the markets force it. Would be interesting to see the turbulence if the 10-year shot past 5%. All the randomness and unpredictable events of the world never cease to amuse me. 

Why do you say that?  What happens if wasteful spending (hundreds of billions in loan cancellations, welfare programs, spending on illegals - their food, medical, legal, housing, jails, $200bn to foreign aid and UN, billions of dollars to places like Harvard that are drowning in cash as it is) is cut?  What happens if numerous government regulations that make life miserable for entrepreneurs (latest example - registering all LLCs, Trusts and partnerships - more headaches and expenses for firms) get pared back?  You could have a situation where 700bn+ of government waste is cut,  Fed cut rates (most of the debt is short term so 100 basis point cut in rates reduces budget deficit by one percentage point of GDP), economy booms as regulations get cut and what do you have?  Gov't spending is down a trillion dollars, GDP is up, and budget deficit as a % of GDP = 3% ($800-900bn / 29 trillion on 2025 forecasts.), still too high, yes, but a far cry from 7% today. 

[TwoCitiesCapital]

6 hours ago, Dinar said:

Why do you say that?  What happens if wasteful spending (hundreds of billions in loan cancellations, welfare programs, spending on illegals - their food, medical, legal, housing, jails, $200bn to foreign aid and UN, billions of dollars to places like Harvard that are drowning in cash as it is) is cut?  What happens if numerous government regulations that make life miserable for entrepreneurs (latest example - registering all LLCs, Trusts and partnerships - more headaches and expenses for firms) get pared back?  You could have a situation where 700bn+ of government waste is cut,  Fed cut rates (most of the debt is short term so 100 basis point cut in rates reduces budget deficit by one percentage point of GDP), economy booms as regulations get cut and what do you have?  Gov't spending is down a trillion dollars, GDP is up, and budget deficit as a % of GDP = 3% ($800-900bn / 29 trillion on 2025 forecasts.), still too high, yes, but a far cry from 7% today. 

 

is this what happened his first time around? Or was he running the largest peace-time deficits ever to fund tax cuts for the wealthy even pre-covid? 

[gfp]

I've seen all these analyses of the 'trump trade' effects like curve steepening, un-inverting, etc.  I think the real beneficiaries of the surge in Trump's odds of winning has basically been the Gregmal portfolio - rich people stuff - trophy assets like sports teams, real estate, high end real estate, Florida.

[tede02]

Guys, guys, guys, lets not go down the politics rabbit hole. All I'm getting at is if the Democrats were to prevail in November, I think it's likely they wouldn't renew the current tax law which expires at the end of 2025 (they would try to raise revenue). Very hard to see the Republicans letting the tax bill expire. And hard to imagine either party cutting spending in any meaningful way. (Not commenting on the merits of any of this.)

 

I'm just thinking about a situation similar to what occured in the UK in 2022 when Truss proposed tax cuts against an already sizeable deficit and the market wagged its finger as in, "not going to happen." It seems like we just keep marching in that direction. 

[gfp]

Don't hold your breath waiting for the bond vigilantes to set government interest rates in the United States.

[tede02]

58 minutes ago, gfp said:

Don't hold your breath waiting for the bond vigilantes to set government interest rates in the United States.

 

I guess I could have just shortened up my inital post to, "I wonder if the bond vigilantes are going to return soon?" 

 

For now, you definitely could be right. But the fiscal situation here is so unsustainable especially with Medicare and Social Security BOTH headed for fiscal crisis within 5-10 years. It seems a market shock may be the only thing that will force some kind of reform. If long rates popped up to 6, 7 or 8%, that would be pretty wild. 

[gfp]

35 minutes ago, tede02 said:

 

I guess I could have just shortened up my inital post to, "I wonder if the bond vigilantes are going to return soon?" 

 

For now, you definitely could be right. But the fiscal situation here is so unsustainable especially with Medicare and Social Security BOTH headed for fiscal crisis within 5-10 years. It seems a market shock may be the only thing that will force some kind of reform. If long rates popped up to 6, 7 or 8%, that would be pretty wild. 

 

What do you mean by "unsustainable" ?  Do you simply mean, "might cause inflation or weakness in our currency" or do you mean actually unsustainable as in "this can't continue - the checks will start to bounce"?  There are always consequences - but the word "unsustainable" is overused by people who don't define what they mean by it.

[Gregmal]

All I know is that the people who fixated on bonds have nothing to show for their efforts the past few years, and I'll gander it continues to be a total waste of time fixating on this space. 

[thepupil]

On 8/22/2023 at 12:38 PM, thepupil said:

yes, agreed with @Spekulatius. I don't think anyone is saying that "bonds will absolutely and definitively beat stocks over the next 10 years". What I'm saying is that "having 10-20-30% in bonds will potentially have lower opportunity cost [maybe none or negative cost] vs a portfolio of 100% stocks over the next 10 years when comparing portfolios comprised of broad market indices".

 

To phrase a bit less clumsily, I expect the go-forward return on a portfolio of 70% stocks / 30% bonds to be "competitive" with a portfolio of 100% stocks. I expect the path to more closely resemble 

 

2003-2013*

 

than 2013 to 2023 

 

 

2003-2013, balanced index lagged all stocks by 0.5% / yr. 2013-2023 that number was close to 5.0%/yr. That's a huge difference. I'm not looking to lag passive indices by 5%/yr, that's destructive to my wealth / purchasing power. If I lag by 0.5% and have a smoother ride, that's a tradeoff I'm willing to take. All the better if I can outperform in my stocks and not lag at all. 

 

The reasoning is that we are at a 5 handle on agg (mostly tsy's and MBS) and a 6 handle on IG corps. Bond returns, if held for their duration are pretty predictable; if you lose initially, you make it back on the reinvestment of coupon. I expect them over the duration of the index (7-8 years) to return their current YTM's. I also expect some rebalancing benefit. I don't expect stocks to repeat the 12%/yr of the prior decade. I'm not crazily bearish, just when i look at the ingredients of earnings growth, yield, multiple change, etc, I don't get to 12%.

 

Therefore, for many of us who can only invest in indices for a substantial portion of our ongoing and existing savings, I think it makes more sense to own bonds, than it has in the last decade. 

 

I also find myself surprised that the bond market has become MUCH more attractive and we've entered a much higher return on savings environment without me having experienced any personal wealth destruction. It seems like I (and a lot of otgher folks) have a ZIRP NAV and now get to ivnest at a PIRP RoA / RoE. Feels like a free lunch for savers. To some extent, I don't think that is sustainable/will last and am therefore adding a chunk of duration, which introduces more price risk, but also more upside if things change. 

 

 

*i just picked these as arbitrary 0-10, and 11-20 lookback so as to not be accused of cherrypicking and just for ease, not trying to pick top of market to bottom of market, or only have "the lost decade" etc. 

 

 

are we "fixating" on bonds or just moving from #neverbonds to #maybesomebonds?

 

of course, since I wrote that, SPY is +30.1% and bonds are +6.8%, but it's also been 9 months and not 7-10 years. 

 

 

 

[Dinar]

4 hours ago, TwoCitiesCapital said:

 

is this what happened his first time around? Or was he running the largest peace-time deficits ever to fund tax cuts for the wealthy even pre-covid? 

Well, some of it did.  No student loan bailouts, no $100bn for Ukraine to repay Hunter's Burisma payments, no millions of illegals draining the federal, state and local coffers.  Oh, and the number of regulations declined. 

[TwoCitiesCapital]

2 hours ago, Dinar said:

Well, some of it did.  No student loan bailouts, no $100bn for Ukraine to repay Hunter's Burisma payments, no millions of illegals draining the federal, state and local coffers.  Oh, and the number of regulations declined. 

 

So despite NOT doing a lot of things, he still managed to run the largest peace time deficits and failed to solve the "border crisis" with his wall? 

 

Glad we're on the same page here. 

 

3 hours ago, Gregmal said:

All I know is that the people who fixated on bonds have nothing to show for their efforts the past few years, and I'll gander it continues to be a total waste of time fixating on this space. 

 

I have plenty to show for plenty of my fixed income positions. The only ones doing poorly are the TLT/ZROZ duration plays that admittedly won't do much until the Fed cuts. 

 

The emerging markets funds I've owned have done ~10%/annum over the last 2-years. 

The CEFs had double digit returns in 6 months before I closed them out. 

My levered mortage exposure in mREITS is up mid-teens from a year ago. 

 

Sure - not the same returns as the SPY, but hella-good annualized returns w/o falling rates and the difference is you'll keep most of it in a recession scenario. Can't necessarily say that about the S&P or any stocks. 

Edited July 17 by TwoCitiesCapital

[dealraker]

10 minutes ago, TwoCitiesCapital said:

 

So despite NOT doing a lot of things, he still managed to run the largest peace time deficits and failed to solve the "border crisis" with his wall? 

 

Glad we're on the same page here. 

 

 

I have plenty to show for plenty of my fixed income positions. The only ones doing poorly are the TLT/ZROZ duration plays that admittedly won't do much until the Fed cuts. 

 

The emerging markets funds I've owned have done ~10%/annum over the last 2-years. 

The CEFs had double digit returns in 6 months before I closed them out. 

My levered mortage exposure in mREITS is up mid-teens from a year ago. 

 

Sure - not the same returns as the SPY, but hella-good annualized returns w/o falling rates and the difference is you'll keep most of it in a recession scenario. Can't necessarily say that about the S&P or any stocks. 

Sorta easier in some respects to just own some decent businesses via stocks and live long for satisfactory results.  Some, like parts of your health given this longevity, blow up.  But kind of like my enlarged prostate that's getting me a delightful cystocopy in a month, overall the result is - compared to others - just a relative short pain in the groin on your way to financial success.  

[Gregmal]

Pullbacks and corrections are devastating. What can I say?