Bonds!

[BG2008]

3 hours ago, Spekulatius said:

Has anyone ever seen a bond investor getting rich? I haven’t , except money manager like Bill Gross, but of course they owned a business not bonds directly.

 

Bonds are a wealth preservation vehicle (and have their place for this purpose) not a way to build wealth.

 

Farifax and their long bond trades? 

Anyone who bought long duration bonds in the early 80s 

[BG2008]

4 minutes ago, thepupil said:

 

My dad retired in 2007. He got "rich" (depending on your definition) through extreme concentration. He was an exec at a company that went public and put a lot in the stock at IPO. Company got LBO'd so he crystallized his gains, company later went bankrupt after he left. 

 

He stayed rich via bonds. Being 60% muni's w/ a typical Merrill lynch guy into the GFC saved my family's financial health as they weren't forced to make withdrawals at steeply discounted stock prices and didn't panic.. they owned a valuable unlevered home and by no means would have been destitute but a real life "sequence of returns risk" case study; if they went in 100% stocks, I'd imagine their standard of living would be lower than it is today.

 

Now in 2013, I took over and it was stil like 50/50 and thought that was too conservative and switched things up to more like 70-80% stocks / 20-25% cash and it's the best and most impactful financial decision i've ever made (we're now more like 70/30 with the 30 being in bonds not cash built up the bond position over last year or so. 

 

Bonds are indeed a wealth preservation tool. and for many that's the goal. 

 

This puts a smile on my face. When I was younger and more immature. I would criticize a lot of active managers who did not have a 15% net CAGR over their careers.  As I have gotten older and dissected more investment returns. Sequences of returns is absolutely a thing. Look at a lot of the heroes from 2020 that were up 100-200%. Look at a lot of fintwits who posted 30% CAGR since 2017-2018 during a period when if you went long "unprofitable growth equity" factors, you killed it. Imagine if you had money with someone volatile but also need to take out a certain $ every year. When you're down 50%, that 4% withdrawal is now 8%. All a sudden now, you're fighting a much harder war. 

 

Guys who was toiling and buying highly cashflow generative companies with low leverage got left behind and got called "washed out". My experience has been that if you've got wealth and you're older, you worry more about wealth preservation and beating inflation by 4-5% a year over the long run.  

 

How does this tie into bonds? It's the view that if you're wealthy already, you should have some bonds in your portfolio.  

[Spekulatius]

1 hour ago, johnpane said:

Marty Whitman? Howard Marks?

 

Distressed credit.

Howard marks got rich running a business dealing with distressed credit. But it is a good point that distressed credit can deliver equity like returns so that is one way to get rich as well. The opportunities there are quite infrequent though, so I think it's really hard to get rich on distressed credit alone.

[bizaro86]

28 minutes ago, Spekulatius said:

Howard marks got rich running a business dealing with distressed credit. But it is a good point that distressed credit can deliver equity like returns so that is one way to get rich as well. The opportunities there are quite infrequent though, so I think it's really hard to get rich on distressed credit alone.

 

I think it could be done with concentration, but you'd have to pick your spots and the patience required to stay in tbills or something when there weren't opportunities would be difficult.

 

I've had 3 distressed credit ten baggers over a 15 year period, and none of them overlapped time wise. If I had concentrated more in those ideas I'd be considerably wealthier. The first one was a 5% position on a 30k portfolio when I first started investing, so made very little actual difference in terms of $$ - in retrospect that one should have been a 50% position, that would have made it like 1 year of savings if went to zero (which was possible) but would have been way more meaningful if it had hit.

 

Of course, it's risky though, as I've had distressed credit positions go to zero as well, including one that was my largest position at one point.

[John Hjorth]

4 minutes ago, bizaro86 said:

... Of course, it's risky though, as I've had distressed credit positions go to zero as well, including one that was my largest position at one point.

 

Thank you for sharing, @bizaro86,

 

It reads almost unbearable to me, but YMMV.

[Red Lion]

On 3/2/2023 at 7:17 PM, Gregmal said:

Totally lol. 4% on your cash is everywhere I look. Which I guess makes sense. It’s like waiving pussy at a computer nerd who just left college and got his first job at Google. Little does he know, that in 5 years he ll realize it ain’t nothing special despite the fact that he was deprived of it for so much of his life. 

LMAO

[TwoCitiesCapital]

Jeff Gundlach has a podcast today. For the last several years, he's been pointing to the copper/gold ratio being a pretty good indicator or where the 10-year yield should be. 

 

The general argument is that inflation/economic growth impact copper significantly more than gold. When copper is rising faster than gold, you need higher rates for inflation/growth and when its falling faster than gold you need lower rates. 

 

Historically it's been pretty accurate. 

As of today, it suggests 10-year yields are about 1% too high. 

[Intelligent_Investor]

Imo what's interesting about the bond market isn't what rates are gonna do in the next 12 months (pretty much guaranteed to go to 5+%), but what will happen in the intermediate to longer term. Is the bond bull market finally dead? Or is this a temporary phenomenon and we will be at 3.5% interest rates and on the downtrend by 2025? I personally don't think I'm skilled enough at predicting any of those so I will just roll short term treasuries for now, but this dynamic is fascinating.

[coc]

The % of money you have in stocks should be heavily influence by your spending rate as  % of your net worth. If I knew someone spending 15% of their money per year, I'd have them at least 50% t-bills/short term bonds. If they were spending 1.5% of their money I'd have them 90-95% stocks. 

 

You never want to be selling into an extreme drawdown. This is why WB provisioned for his wife to be 90% S&P/10% t-bills. In a serious downturn where stocks are very undervalued you just spend the cash-t-bills for as long as you can.

Edited March 8, 2023 by coc

[tede02]

Did anyone get some 2-year Treasurys at the five-handle? I bought one tranche for my personal account before the market tumult! Amazing how fast the sentiment can change. Makes this game so interesting. 

[Red Lion]

6 minutes ago, tede02 said:

Did anyone get some 2-year Treasurys at the five-handle? I bought one tranche for my personal account before the market tumult! Amazing how fast the sentiment can change. Makes this game so interesting. 

 
I got some for next November at a 5 handle. Not quite 2 years. 

[TwoCitiesCapital]

1 hour ago, tede02 said:

Did anyone get some 2-year Treasurys at the five-handle? I bought one tranche for my personal account before the market tumult! Amazing how fast the sentiment can change. Makes this game so interesting. 

 

I've been buying short-term bonds funds because I wanted the mortgage exposure too. 

 

I just purchased a pretty large slug of JSCP at a 6.4% YTM last week. Have been DCA'int into JSDUX for months in my 401k which has a ~6.25% YTM. 

 

Not quite the same as a Treasury since both own credit and mortgages too, but each is about ~2-3 year avg maturity/duration. Each with a 6+% YTM. 

 

Have also been DCA'ing RGVGX in my retirement accounts, but that's more intermediate straight duration exposure. 

Edited March 15, 2023 by TwoCitiesCapital

[tede02]

35 minutes ago, TwoCitiesCapital said:

 

I've been buying short-term bonds funds because I wanted the mortgage exposure too. 

 

I just purchased a pretty large slug of JSCP at a 6.4% YTM last week. Have been DCA'int into JSDUX for months in my 401k which has a ~6.25% YTM. 

 

Not quite the same as a Treasury since both own credit and mortgages too, but each is about ~2-3 year avg maturity/duration. Each with a 6+% YTM. 

 

Have also been DCA'ing RGVGX in my retirement accounts, but that's more intermediate straight duration exposure. 

 

Sounds interesting. Where do you get the fund-level YTM figures?

Edited March 15, 2023 by tede02
typo

[TwoCitiesCapital]

51 minutes ago, tede02 said:

 

Sounds interesting. Where do you get the fund-level YTM figures?

 

Typically morningstar or a fund fact sheet.

 

At this point, I dunno if the extra yield from spreads will counteract the credit spread widening that I expect, but the equity-like returns without the equity risk was too attractive to turn away - especially if I'm wrong about a recession and we keep grinding slowly towards one. 

 

Will probably only be adding to the Treasury fund going forward though - cascading bank failures strikes me more as the start of an economic event as opposed to the end of one. 

[tede02]

It's interesting that despite treasury yields cratering over the last week, yields on brokered CDs are holding up. I've bought some call protected 2 and 3 year issues over the last few days at 5%+. Apparently banks want deposits again...LOL. 

[TwoCitiesCapital]

1 hour ago, tede02 said:

It's interesting that despite treasury yields cratering over the last week, yields on brokered CDs are holding up. I've bought some call protected 2 and 3 year issues over the last few days at 5%+. Apparently banks want deposits again...LOL. 

 

They want them so bad that they've already borrowed $160+ billion from the Fed to make up for not having them as per Bloomberg. 

 

That's $160 billion at a negative NIM

[james22]

On 3/2/2023 at 9:17 PM, Gregmal said:

It’s like waiving pussy at a computer nerd who just left college and got his first job at Google. Little does he know, that in 5 years he ll realize it ain’t nothing special despite the fact that he was deprived of it for so much of his life. 

 

40 years later, it's still pretty special.

[tede02]

Rates are marching up again. The 2-year is over 4.5%. I've been much more interested in the fixed income markets in recent years. It's a different game. Financial media often treat the bond market as a fortune teller. An inverted curve has been historically good at signaling before recessions but in the short-run, the bond market doesn't seem better than anyone else. In March, just before banks started failing, the 2-year broke through 5% when the narrative was inflations is stil hot and the Fed may have to go to 6%. Then the 2-year cratered into the 3s when the narrative flipped to "things are breaking" and recession is imminent. Now we're back to economy still appears resilient so Fed may need to hike a few more times and the entire curve has moved up. LOL. Amusing. Just random musings. I picked up some more short-term treasurys this week with rates popping up. For the hell of it I grabbed a few of the ultra short maturies that gapped out because of showmanship in Washington, etc. 

Edited May 26, 2023 by tede02

[TwoCitiesCapital]

3 hours ago, tede02 said:

Rates are marching up again. The 2-year is over 4.5%. I've been much more interested in the fixed income markets in recent years. It's a different game. Financial media often treat the bond market as a fortune teller. An inverted curve has been historically good at signaling before recessions but in the short-run, the bond market doesn't seem better than anyone else. In March, just before banks started failing, the 2-year broke through 5% when the narrative was inflations is stil hot and the Fed may have to go to 6%. Then the 2-year cratered into the 3s when the narrative flipped to "things are breaking" and recession is imminent. Now we're back to economy still appears resilient so Fed may need to hike a few more times and the entire curve has moved up. LOL. Amusing. Just random musings. I picked up some more short-term treasurys this week with rates popping up. For the hell of it I grabbed a few of the ultra short maturies that gapped out because of showmanship in Washington, etc. 

 

Front end bonds are all priced off of Fed policy, so it makes sense they'd be more volatile as that policy is uncertain. 

 

Longer term bonds though? The 10-year has been between 3.5-4% that whole time. In fact, with a few short lived exceptions, it's been in that range for the last 7 months. 

 

I'd say that's fairly reasonable volatility and that the 10-year is staying fairly consistent in what it expects for the US economy: a slowdowns of economic growth and inflation coming down significantly. 

[tede02]

Wow, in March, before SVB went down, the 2-year broke through 5% before crashing down under 4%. Consensus was pretty strong that we wouldn't see 5% again and yet here we are. The 10-year is above 4% also which is toward the high side of it's range. 

 

Gundlach has talked about buying long bonds as an credit and equity hedge. This is an intriguing idea. 

[Gmthebeau]

13 minutes ago, tede02 said:

Wow, in March, before SVB went down, the 2-year broke through 5% before crashing down under 4%. Consensus was pretty strong that we wouldn't see 5% again and yet here we are. The 10-year is above 4% also which is toward the high side of it's range. 

 

Gundlach has talked about buying long bonds as an credit and equity hedge. This is an intriguing idea. 

 

Bonds should be looked at from a wealth preservation standpoint in my opinion.  If you buy quality bonds, hold to maturity, you won't lose money and you make the income - which is pretty decent for the first time in like a decade.  Most people who buy bonds buy them for this reason.  They already have enough money to live the rest of their lives, and want to preserve wealth.  Trying to get the highest return possible is not everyone's goal.   If bonds yields eventually fall you could sell them for a capital gain - but that should not be the focus of why you bought them.  Trying to predict which way interest rates are going to go in a given timeframe is pretty tough to do.  

[Intelligent_Investor]

4 handle on the 30 year

[Viking]

We are told that the 10 year US treasury is the security that all other investments are priced off of. The yield on the 10 year is now 4.04%. If it takes out the March high of 4.08% and keeps going this could get interesting. The current yield takes us all the way back to 2007. Brave new world. 
 

What does it all mean for asset classes? I am not really sure. There are simply too many cross currents today to have a strong opinion about how it all plays out.

 

My guess is we will see elevated volatility. The bond market has been on a 6 Flags roller coaster ride with yields spiking in early March, plummeting in April and once again spiking in June/July. Stocks? Straight up. Hymmmm…

[Paarslaars]

Stocks straight up, I wish... Tech sure but that industry is carrying the S&P right now.

[TwoCitiesCapital]

36 minutes ago, Viking said:

We are told that the 10 year US treasury is the security that all other investments are priced off of. The yield on the 10 year is now 4.04%. If it takes out the March high of 4.08% and keeps going this could get interesting. The current yield takes us all the way back to 2007. Brave new world. 
 

What does it all mean for asset classes? I am not really sure. There are simply too many cross currents today to have a strong opinion about how it all plays out.

 

My guess is we will see elevated volatility. The bond market has been on a 6 Flags roller coaster ride with yields spiking in early March, plummeting in April and once again spiking in June/July. Stocks? Straight up. Hymmmm…

 

I mean, it was @ 4.25% in October so not sure what taking out 4.08% does, or means, if anything. 

 

If we get another hike out of the Fed this month, I can see the 10-year hitting 4.25% again - and again would view it as an opportunity to add duration and high quality spread product (like mortgages). 

Edited July 6, 2023 by TwoCitiesCapital