Bonds!

[Spekulatius]

Yep, money is getting tighter in some areas. Add to this the increase in risk free rates and the tightening becomes substantial:

https://fred.stlouisfed.org/series/BAMLH0A0HYM2

[thepupil]

I see cash HY at about 8.5% yield / $87 avg dollar price and CDX at +590 today.

 

Getting closer to buying high yield bonds....

[tede02]

There's an article in the WSJ today regarding levered, closed-end muni funds, that have gotten hammered. I've never owned them but there definitely looks to be some opportunity. Might be early. 

 

https://www.wsj.com/articles/leveraged-muni-funds-face-losses-as-bond-rout-drags-on-11655871989?mod=hp_lead_pos2

Edited June 22, 2022 by tede02

[ValueMaven]

@thepupil Those MMP Corps you highlighted are down another 20 points (mid 70s) ... what do you think of them here given the move in rates??  I find them very interesting imho ...

[thepupil]

Yea I own them, generally good 20 yr credits can be had for 5.6% (Berkshire energy to 6.7% charter)

[thepupil]

like this bond at 6.5%. Aggregates are a high multiple asset (but cyclical) and MLM owns a bunch of ‘em. $25B EV $5B of debt, 3.5x levered but will be much more levered in a recession as EBITDA will decline but my point is that this is 25% LTV / not going BK absent a depression. 
 

  
 

[ValueMaven]

@thepupil why have those MMP bonds fallen so much?  It's 20 year paper I get it - so a lot of duration risk - but the par on the credit in my view is money good.  Thoughts??

[thepupil]

I don’t think they’re unique. They trade roughly in line with other similar duration/credit paper. It’s just a company I’m comfortable with it’s not uniquely “cheap” or anything. Just spread change + duration in line with mkt.

[tede02]

2022 might be a once in a career situation in the context of bonds. They've been absolutely crushed. There are some closed end funds with leverage that are down in the 50% range. But what's interesting so far is all the losses are duration related. I was on a PGIM fixed income call yesterday and they pointed out that spreads over treasurys are still pretty average. 

 

Separately Jeffrey Gundlach made an interesting point. He noted how forecasters are expecting inflation to come down and magically stop at 2%. He went on to suggest that there's a good chance that central banks over-do it, we get a global recession and inflation plummets to the point of deflation. Long duration could then be a big winner. Its just interesting to me. I used to spend little to no time on fixed income but in recent years I've learned a lot and found it quite intriguing. It's a different game than equities and there can be very profitable situations. 

Edited September 28, 2022 by tede02

[TwoCitiesCapital]

22 hours ago, tede02 said:

2022 might be a once in a career situation in the context of bonds. They've been absolutely crushed. There are some closed end funds with leverage that are down in the 50% range. But what's interesting so far is all the losses are duration related. I was on a PGIM fixed income call yesterday and they pointed out that spreads over treasurys are still pretty average. 

 

Separately Jeffrey Gundlach made an interesting point. He noted how forecasters are expecting inflation to come down and magically stop at 2%. He went on to suggest that there's a good chance that central banks over-do it, we get a global recession and inflation plummets to the point of deflation. Long duration could then be a big winner. Its just interesting to me. I used to spend little to no time on fixed income but in recent years I've learned a lot and found it quite intriguing. It's a different game than equities and there can be very profitable situations. 

 

I've been slowly increasing duration for this is exact reason. 10-30 year treasuries are all yielding around 4%.

 

If the Fed cuts back to zero, it's highly probable these bonds go up 15-30% in an environment where equities are down an additional 20-30%.  And all of that assumes the 10-year stops @ 2% for the bottom which may not be the case. Not a bad hedge IMO. 

 

I've been moving a number of my short-term bonds funds to intermediate exposures and adding small positions in ZROZ/ TLT now that 10-year treasuries are back above 3.5%. 

 

And if you don't want as much duration/credit exposure, agency mortgages at 6-7% is crazy. Especially if you think that the refinancing wave from lower rates doesn't hit due to negative equity in all of the newly issued mortgages...

Edited September 29, 2022 by TwoCitiesCapital

[crs223]

Fight the fed!

[rohitc99]

46 minutes ago, TwoCitiesCapital said:

 

I've been slowly increasing duration for this is exact reason. 10-30 year treasuries are all yielding around 4%.

 

If the Fed cuts back to zero, it's highly probable these bonds go up 15-30% in an environment where equities are down an additional 20-30%.  And all of that assumes the 10-year stops @ 2% for the bottom which may not be the case. Not a bad hedge IMO. 

 

I've been moving a number of my short-term bonds funds to intermediate exposures and adding small positions in ZROZ/ TLT now that 10-year treasuries are back above 3.5%. 

 

And if you don't want as much duration/credit exposure, agency mortgages at 6-7% is crazy. Especially if you think that the refinancing wave from lower rates doesn't hit due to negative equity in all of the newly issued mortgages...

can you share how you are increasing the duration ? buying the 20 yr treasury directly or via TLT

 

also how does one invest in the agency mortgages ?

 

thanks in advance

[Spekulatius]

On 9/28/2022 at 12:35 PM, tede02 said:

2022 might be a once in a career situation in the context of bonds. They've been absolutely crushed. There are some closed end funds with leverage that are down in the 50% range. But what's interesting so far is all the losses are duration related. I was on a PGIM fixed income call yesterday and they pointed out that spreads over treasurys are still pretty average. 

 

Separately Jeffrey Gundlach made an interesting point. He noted how forecasters are expecting inflation to come down and magically stop at 2%. He went on to suggest that there's a good chance that central banks over-do it, we get a global recession and inflation plummets to the point of deflation. Long duration could then be a big winner. Its just interesting to me. I used to spend little to no time on fixed income but in recent years I've learned a lot and found it quite intriguing. It's a different game than equities and there can be very profitable situations. 

Bonds get interesting when spreads blow out. So far this has not happened. I like bonds in the BB/BB+ range (just below investment grade) and those that go from BBB- (barely investment grade) to junk often see a lot of selling. I want to see double digit (or close to) interest rates and nice spreads. Then you can get equity like returns with those and often they bounce back a whole lot quicker than stocks.

 

I just need to be comfortable with the underlying business. The last chance were pipeline and MLP stocks in ~2015 for me. COVID-19 also represented an opportunity, but it was so short lived, that I didn't manage to take advantage of it.

[thepupil]

BBB 10 yr spreads are currently 230. The average since 2000 is 260. The average for the past 10 years is 240.  

 

For perspective covid was ~430 and GFC was 600. December 2018 was about where things are now. 

 

It's true. Spreads are not really wide and are pretty much average. 

 

I have a much lower return requirment than @Spekulatiusfor bonds. I think if one can get 6-7% with decent duration (10-20 years) from a very healthy company that that has a role in a portfolio. it's just a safe way to build up a mortgage offset and to increase ones recurring cash flow for reinvestment. I do not want to be 100% equities forever, because i don't plan on having enough money to where i'd be comfortable with a really really low withdrawal rate. having a portion of the portfolio that's spitting out cash and not dependent on market for return is nice (and is structurally ahead of equity). 

 

I do not think we revisit covid like spreads given that tsy bonds are offering decent yields. IG bonds are at all in yields that solve a lot of asset owner problems. To an insurance company, a 400 spread over 2% 10 yr (covid) is the same nominal return as  200 spread over a 4% 10 yr. Absolute yields matter too. we are at the highest absolute yield on BBB 10 yr debt since September 2009 (6%). 10 yr average is 3.5%. 20 yr average is 4.5%

 

Corporate (and by that I mean large cap IG corporate) credit quality is spectacular. BBB historical default rate is 0.3% and corproates will enter this period with the most interest coverage, longest duration, lowest coupon debt ever. the bonds are all getting chopped to discounts well below par because coupons are so low which provides theoretical downside protection (though i don't think that really matters because virtually none will default). 

 

also i think we'll see less creditor unfriendly things like debt funded buybacks in this environment. on the margin companies will deploy incremental capital to deleveraging. a negative for equities, but a posiitve for the owner of healthy corporate debt.

 

I also think there's an argument that why even bother with corporates when you can buy mortgages with no credit risk for similar yields (but less convxity and predictability of cash flows)

 

 

Edited September 29, 2022 by thepupil

[ValueMaven]

For what its worth - I was able to get 6M UST bills @ 3.981% on 9/26 auction - with no commission or brokerage fees from T Direct ... 

[CorpRaider]

Nice.

[TwoCitiesCapital]

23 hours ago, rohitc99 said:

can you share how you are increasing the duration ? buying the 20 yr treasury directly or via TLT

 

also how does one invest in the agency mortgages ?

 

thanks in advance

 

As mentioned, via funds and ETFs. Most of my fixed income positions are held in 401ks, HSAs, and etc where options are limited and I can't do individual securities. 

 

TLT/ZROZ/RGVGX are the primary Treasury funds I use to increase/decrease duration from money market/bank deposit type investments. I have a few intermediate corporate/core funds as well, but they're small relative to the Treasury position since spreads have not yet widened as has been pointed out by others. 

 

I also switch some of my mixed exposures from things like Pimco's StocksPLUS funds to their StcoksPLUS Long Duration fund which gives me an incremental duration/yield pick-up without changing the equity exposure and leverages dollars put in the market nearly 2:1. 

 

As far as agency bonds, there are funds/ETFs that track those as well. Or you can take a levered bet by buying agency mortgage REITs like AGNC which is what I've started adding. 

 

 

[rohitc99]

2 hours ago, TwoCitiesCapital said:

 

As mentioned, via funds and ETFs. Most of my fixed income positions are held in 401ks, HSAs, and etc where options are limited and I can't do individual securities. 

 

TLT/ZROZ/RGVGX are the primary Treasury funds I use to increase/decrease duration from money market/bank deposit type investments. I have a few intermediate corporate/core funds as well, but they're small relative to the Treasury position since spreads have not yet widened as has been pointed out by others. 

 

I also switch some of my mixed exposures from things like Pimco's StocksPLUS funds to their StcoksPLUS Long Duration fund which gives me an incremental duration/yield pick-up without changing the equity exposure and leverages dollars put in the market nearly 2:1. 

 

As far as agency bonds, there are funds/ETFs that track those as well. Or you can take a levered bet by buying agency mortgage REITs like AGNC which is what I've started adding. 

 

 

thank you !

[Viking]

On 9/29/2022 at 10:52 AM, thepupil said:

BBB 10 yr spreads are currently 230. The average since 2000 is 260. The average for the past 10 years is 240.  

 

For perspective covid was ~430 and GFC was 600. December 2018 was about where things are now. 

 

It's true. Spreads are not really wide and are pretty much average. 

 

I have a much lower return requirment than @Spekulatiusfor bonds. I think if one can get 6-7% with decent duration (10-20 years) from a very healthy company that that has a role in a portfolio. it's just a safe way to build up a mortgage offset and to increase ones recurring cash flow for reinvestment. I do not want to be 100% equities forever, because i don't plan on having enough money to where i'd be comfortable with a really really low withdrawal rate. having a portion of the portfolio that's spitting out cash and not dependent on market for return is nice (and is structurally ahead of equity). 

 

I do not think we revisit covid like spreads given that tsy bonds are offering decent yields. IG bonds are at all in yields that solve a lot of asset owner problems. To an insurance company, a 400 spread over 2% 10 yr (covid) is the same nominal return as  200 spread over a 4% 10 yr. Absolute yields matter too. we are at the highest absolute yield on BBB 10 yr debt since September 2009 (6%). 10 yr average is 3.5%. 20 yr average is 4.5%

 

Corporate (and by that I mean large cap IG corporate) credit quality is spectacular. BBB historical default rate is 0.3% and corproates will enter this period with the most interest coverage, longest duration, lowest coupon debt ever. the bonds are all getting chopped to discounts well below par because coupons are so low which provides theoretical downside protection (though i don't think that really matters because virtually none will default). 

 

also i think we'll see less creditor unfriendly things like debt funded buybacks in this environment. on the margin companies will deploy incremental capital to deleveraging. a negative for equities, but a posiitve for the owner of healthy corporate debt.

 

I also think there's an argument that why even bother with corporates when you can buy mortgages with no credit risk for similar yields (but less convxity and predictability of cash flows)

 

 

Thanks for providing the historical averages and where spreads are today. The lack of widening is quite the head scratcher. And definitely something worth monitoring moving forward. 
—————-

I haven’t owned bonds in years. Bond substitute type stocks (my loose definition) in Canada have come down the past 2 weeks (@10%). But given the size of the increase in bond yields this year these stocks actually look expensive. People who own these stocks for yield/safety likely do not realize bonds might now offer a better risk/reward tradeoff.

Utilities: Fortis 4.3% yield

Pipelines: Enbridge 6.7% yield

Telecom: BCE 6.35%

 

All of these companies have massive debt levels. What happens if interest rates stay high for years (i.e. the next 5). What happens to the business model when they have to issue/roll over debt at a much higher interest rate?

Edited October 2, 2022 by Viking

[TwoCitiesCapital]

2 hours ago, Viking said:

Thanks for providing the historical averages and where spreads are today. The lack of widening is quite the head scratcher. And definitely something worth monitoring moving forward. 
—————-

I haven’t owned bonds in years. Bond substitute type stocks (my loose definition) in Canada have come down the past 2 weeks (@10%). But given the size of the increase in bond yields this year these stocks actually look expensive. People who own these stocks for yield/safety likely do not realize bonds might now offer a better risk/reward tradeoff.

Utilities: Fortis 4.3% yield

Pipelines: Enbridge 6.7% yield

Telecom: BCE 6.35%

 

All of these companies have massive debt levels. What happens if interest rates stay high for years (i.e. the next 5). What happens to the business model when they have to issue/roll over debt at a much higher interest rate?

 

Spreads traditionally tighten in hiking cycles because hiking occurs in economies that can typically handle it which are low credit event periods. 

 

This helps offset the duration risk which is why IG credit is often preferred to treasuries in hiking cycles.

 

It's not a shocker that they're tight, but you would expect them to widen once the recession becomes obvious... But then is often somewhat offset by the duration as rates come down. 

[no_free_lunch]

I don't know about the others but Fortis should be ok.  They have a low debt ratio relative to their peers and it's a long debt maturity profile.  I think 80% is 2026 or later.  Meanwhile they continue to make investments in capacity and emission standards.  If the government wants the green revolution to happen they will need to continue to make these investments and to be compensated.  If not, they will pull back on investment as leverage against the regulators.  This is definitely a headwind but should be ok and they have handled higher interest rates than today in the past.

Edited October 3, 2022 by no_free_lunch

[Red Lion]

I've been dabbling in some bonds lately. I bought 3 issues today. Most of the money is going into the short duration T-bills, but I'm also dabbling in some long duration TIPS now since they look attractive to me right now. 

 

 

9128284H0 - TIPs expiring April 23, I believe these come at about a 2.3% YTM based on my purchase price plus inflation adjustment. This seems too good to be true, so I only bought a small position until I get more comfortable with the inflation adjustment on these bonds. It seems like the super short term TIPS are mispriced and are very attractive, but maybe I'm just being stupid and missing something. 

 

912796YN3 - 4% YTM expiring 4/6/23 - shortest duration I could find to get 4% YTM, this was my biggest buy today 

 

912810RF7 - 2% YTM TIPS bond maturing in February 2044

I think these are actually a really interesting deal right now. I've been avoiding duration at all costs in bonds, but these are a 1.375% coupon TIPS bond maturing in February 2044, they are trading at just under 90 cents on the dollar for about a 2% coupon plus inflation adjustment for the next 21 years. 

 

If real yields on these long term tips got to 3-4% I would make these a huge portion of my portfolio, right now I'm just starting to dabble. 

 

 

[matthew2129]

Today's 4.08% intraday high on the 10yr yield felt an awful lot like the top

[ValueMaven]

Ya ... and now its 4.25% ... dont try and guess where rates are going 

[ValueMaven]

Have been buying a ton of the Wells Fargo Series preferred issuance recently.  

$25 par trading at $22.50 ... 5.85% yield = YTM of 7%+ ... operational improvements, and exposure to rising rates ... the bank is doing fine fundmentally.  net interest income was up 19% Q/Q (!!).  This is a very safe security which has already seen a lot of downside, and has a compelling yield 

Edited October 21, 2022 by ValueMaven