Bonds!

[tede02]

One reason I'm amazed at the strength in equities this year is investors can literally earn 5%+ sitting in a money market instrument. I'm surprised that yields in that range have not sapped more demand for equities. That said, clearly the AI narrative/story has driven most of the rally this year. I agree with Viking's comments about all the cross currents. Really tough to have a strong view. 

 

Buying 2-year treasurys as an equity hedge also seems interesting. Worst-case is you hold to maturity and get your 5%. If economy falls off a cliff, short-rates very likely to collapse and you could find yourself with a decent total return/offset to equity losses. Bonds are presenting an actual alternative to stocks for the first time in 15 years. 

 

This post is kind of all of over the place but as an aside, I was shopping car loans this week because I'll be in the market in th next 6-12 months. I could pay cash but was curious where rates are for top credit, etc. Rates were 6%+. Also noticed mortgage rates are pushing into the 7s. It just makes me wonder if the economy is going to crash into a wall at some point vs. this gradual slowing that seems to be taking place now. 

[james22]

4 hours ago, tede02 said:

One reason I'm amazed at the strength in equities this year is investors can literally earn 5%+ sitting in a money market instrument. I'm surprised that yields in that range have not sapped more demand for equities.

 

~1% after inflation?

 

That's a low hurdle for equities to clear.

 

I believe TINA is now a pretty sticky belief.

 

 

[Spekulatius]

19 minutes ago, james22 said:

 

~1% after inflation?

 

That's a low hurdle for equities to clear.

 

I believe TINA is now a pretty sticky belief.

 

 

I wish bond yield spreads would be higher. I see regular corporate bond ETF's with a ~5.5% yield and high yield bond ETF with 7-7.5%. I would need higher risk spreads to get interested.

 

You can find trash bonds like the 29 $KW bonds (BB rated) here and there for close to 10% yield, but then you need a view on the borrower and watch them closely. Hard to go wrong  with treasury MM funds for ~5% with these alternatives.

[changegonnacome]

I think the 10yr/30yr need to move up a bit before bonds genuinely get interesting....they've been creeping there way back into 4's recently but ya know call me when the 10yr has a 5-handle.....but when/if that does happen they would offer both an ok-ish YTM but also some future capital appreciation to go with that nominal yield......like Druckenmiller said recently.....you'd probably like to own some bonds here as hedge but the rates just arent that exciting relative to history......to recent history......they look great......but the bond bubble of 2010 - 2022 is no yardstick by which to calculate absolute value.

 

For now 30 day Tbills work just fine for surplus cash, even IBKR cash interest works out just great. Until stocks or bonds get genuinely interesting in aggregate again.

Edited July 7, 2023 by changegonnacome

[james22]

On 7/7/2023 at 9:56 AM, tede02 said:

One reason I'm amazed at the strength in equities this year is investors can literally earn 5%+ sitting in a money market instrument. I'm surprised that yields in that range have not sapped more demand for equities.

 

I like to believe investors will increasingly recognize stocks as less risky than they do now, and so value them more highly than they do now:

 

Glassman and Hassett believed that both investors and official commentators had mistakenly considered stocks to be a risky investment which should require a premium return, when compared to 'safe' investments such as government bonds.

 

They argued that if stocks and bonds were treated as equally risky, the Dow Jones index would be around 36,000. Hence, anyone who gets in now and stays for the long haul, can expect returns of around 300 per cent (in addition to the normal interest rate) as the rest of the market wakes up.

 

Once this historic correction is over, the efficient-market hypothesis will hold sway.

 

https://en.wikipedia.org/wiki/Dow_36,000

 

That investors haven't fled equities for 4% bonds encourages this belief.

[LC]

On 7/7/2023 at 8:56 AM, tede02 said:

This post is kind of all of over the place but as an aside, I was shopping car loans this week because I'll be in the market in th next 6-12 months. I could pay cash but was curious where rates are for top credit, etc. Rates were 6%+. Also noticed mortgage rates are pushing into the 7s. It just makes me wonder if the economy is going to crash into a wall at some point vs. this gradual slowing that seems to be taking place now. 

Aside from first time buyers, if nobody is buying second homes/third cars because 6/7% rates have killed those markets, where are people putting those dollars? Seems like equities. 

[Spekulatius]

15 minutes ago, LC said:

Aside from first time buyers, if nobody is buying second homes/third cars because 6/7% rates have killed those markets, where are people putting those dollars? Seems like equities. 

They are buying new cars. You get better financing terms (3-4% interest rates) and now the supply is more plentiful (no more wait lists for a lot of models). I think that’s why new car sales are that strong, it’s a better value proposition than buying a used one.

[Dinar]

2 hours ago, LC said:

Aside from first time buyers, if nobody is buying second homes/third cars because 6/7% rates have killed those markets, where are people putting those dollars? Seems like equities. 

On Maui, the 2nd home market is still very strong because there is no inventory for sale.  

[TwoCitiesCapital]

On 7/6/2023 at 2:31 PM, TwoCitiesCapital said:

 

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). 

 

Well, we didn't take out 4.08 yet - topped at 4.06 and now back down to 3.7s

 

Same with the 2-year. Some thought re-approaching the prior high of 5% meant something, but here we are again at 4.8% after tagging 5%. 

 

For every hike the market prices in, it prices in another cut (or a faster rate of cuts) in the future - at least that's been the case for the 9-months. The 10-year still hasn't exceeded it's October 22 peak and the 2-year is flat to it.  

[Gmthebeau]

1 hour ago, TwoCitiesCapital said:

 

Well, we didn't take out 4.08 yet - topped at 4.06 and now back down to 3.7s

 

Same with the 2-year. Some thought re-approaching the prior high of 5% meant something, but here we are again at 4.8% after tagging 5%. 

 

For every hike the market prices in, it prices in another cut (or a faster rate of cuts) in the future - at least that's been the case for the 9-months. The 10-year still hasn't exceeded it's October 22 peak and the 2-year is flat to it.  

 

I had been trading the range but on this latest rally in bonds I have gone all T-Bills.  The narrative seems to have changed to where more and more people are saying buy bonds.  I think the top end of the range is going to be taken out and we challenge the old cycle highs in yields on the 10-30 year part of the curve.

[Gmthebeau]

On 7/8/2023 at 10:32 AM, james22 said:

 

I like to believe investors will increasingly recognize stocks as less risky than they do now, and so value them more highly than they do now:

 

Glassman and Hassett believed that both investors and official commentators had mistakenly considered stocks to be a risky investment which should require a premium return, when compared to 'safe' investments such as government bonds.

 

They argued that if stocks and bonds were treated as equally risky, the Dow Jones index would be around 36,000. Hence, anyone who gets in now and stays for the long haul, can expect returns of around 300 per cent (in addition to the normal interest rate) as the rest of the market wakes up.

 

Once this historic correction is over, the efficient-market hypothesis will hold sway.

 

https://en.wikipedia.org/wiki/Dow_36,000

 

That investors haven't fled equities for 4% bonds encourages this belief.

 

most investors today have only EVER invested under the FED put regime.  If thats changes due to structurally higher inflation, they will learn a very hard lesson.

[TwoCitiesCapital]

45 minutes ago, Gmthebeau said:

 

I had been trading the range but on this latest rally in bonds I have gone all T-Bills.  The narrative seems to have changed to where more and more people are saying buy bonds.  I think the top end of the range is going to be taken out and we challenge the old cycle highs in yields on the 10-30 year part of the curve.

 

Perhaps. I'm not willing to take the bet that 10-year doesn't surpass 4.25%, but am willing to say I'll be buying more of them if they do. Over the next 12-18 months, I expect that'll be a pretty good rate relative to where they'll terminate in the cutting cycle. 

 

38 minutes ago, Gmthebeau said:

 

most investors today have only EVER invested under the FED put regime.  If thats changes due to structurally higher inflation, they will learn a very hard lesson.

 

I agree that rates may not going back to 0 and that we may never see a 1-handle on the 10-year again. I agree that the long term path for rates will be higher on average than the last 10-years, buty belief is that this inflation is inherently unstable.

 

I DO expect lower rates in the next year or two and that's all that I really care about. Inflation has already cratered despite not yet pricing in the declining trend in housing (and the contraction in credit that has yet to course through the economy). I dunno where 10-year rates bottom, but I can see 2-2.5% being a reasonable target if we do get modest deflation which I believe is possible - particularly if rates keep rising. 

 

My thesis on a boom/bust cycle for inflation, rather than it being a constant 1-3%, seems to be playing out nicely so far. I'm prepared for the market to price in the current bust and then I'll be positioned for the next boom. 

Edited July 18, 2023 by TwoCitiesCapital

[Gmthebeau]

52 minutes ago, TwoCitiesCapital said:

 

Perhaps. I'm not willing to take the bet that 10-year doesn't surpass 4.25%, but am willing to say I'll be buying more of them if they do. Over the next 12-18 months, I expect that'll be a pretty good rate relative to where they'll terminate in the cutting cycle. 

 

 

I agree that rates may not going back to 0 and that we may never see a 1-handle on the 10-year again. I agree that the long term path for rates will be higher on average than the last 10-years, buty belief is that this inflation is inherently unstable.

 

I DO expect lower rates in the next year or two and that's all that I really care about. Inflation has already cratered despite not yet pricing in the declining trend in housing (and the contraction in credit that has yet to course through the economy). I dunno where 10-year rates bottom, but I can see 2-2.5% being a reasonable target if we do get modest deflation which I believe is possible - particularly if rates keep rising. 

 

My thesis on a boom/bust cycle for inflation, rather than it being a constant 1-3%, seems to be playing out nicely so far. I'm prepared for the market to price in the current bust and then I'll be positioned for the next boom. 

 

Lots of people think the 10 year is going back to 2.5% or so - which explains the stock market ramping.  Inflation has come down but the core is still more than double the target of 2%.  The FED still has alot more work to do if they are serious about inflation.  Policy rate should be 6 or even 6.5 already.   I suspect they will be forced to recognize this sooner or later.  The fact that the economy has barely slowed down at the 5% rate tells you they are not really still restrictive.   I think there is a good chance the 10 year goes back to 4.25 and surpasses that high.   The entire curve from 5-30 is still to low.   When/if the FED is forced to recognize they have to once again go higher then they think the curve will probably shift up.

Edited July 18, 2023 by Gmthebeau

[james22]

50 minutes ago, Gmthebeau said:

most investors today have only EVER invested under the FED put regime.  If thats changes due to structurally higher inflation, they will learn a very hard lesson.

 

Most investors today have learned (because they invest automatically into their 401k index fund/s every month) the market is pretty safe over the long-run.

 

Besides, TINA.

[Intelligent_Investor]

The issue is that there is a Washington pun right now, which is much more powerful than any Fed put. If we get into a recession Washington will just print another couple of trillion dollars to get us out of it. Congress hasn't shown any willingness to temper spending and their solution to every crisis seems to be just print their way out. This implies 3 things: 1) Long term monetary devaluation 2) Higher required return on gov't debt 3) Consumer spending and thus corporate earnings will likely have a floor making equities more attractive. We are very much TINA right now

[Gmthebeau]

2 hours ago, Intelligent_Investor said:

The issue is that there is a Washington pun right now, which is much more powerful than any Fed put. If we get into a recession Washington will just print another couple of trillion dollars to get us out of it. Congress hasn't shown any willingness to temper spending and their solution to every crisis seems to be just print their way out. This implies 3 things: 1) Long term monetary devaluation 2) Higher required return on gov't debt 3) Consumer spending and thus corporate earnings will likely have a floor making equities more attractive. We are very much TINA right now

 

With interest rates having moved up so much it will be very hard to spend the way Trump/Biden did recently.  I don't see that at all.

 

I do believe due to the massive debt the FED was intentionally slow in responding to inflation, and continues to be slow to respond.  They want to help inflate way the debt, but obviously they can't say that.

 

I don't see stocks breaking out from their old highs for years.  At best they top the old high slightly to pull in the last suckers then get trashed.  Stocks will be in a trading range for years in my opinion.  At the top of the range people get giddy - as always.

Edited July 19, 2023 by Gmthebeau

[TwoCitiesCapital]

20 hours ago, Gmthebeau said:

 

Lots of people think the 10 year is going back to 2.5% or so - which explains the stock market ramping.  Inflation has come down but the core is still more than double the target of 2%.  The FED still has alot more work to do if they are serious about inflation.  Policy rate should be 6 or even 6.5 already.   I suspect they will be forced to recognize this sooner or later.  The fact that the economy has barely slowed down at the 5% rate tells you they are not really still restrictive.   I think there is a good chance the 10 year goes back to 4.25 and surpasses that high.   The entire curve from 5-30 is still to low.   When/if the FED is forced to recognize they have to once again go higher then they think the curve will probably shift up.

 

Barely slowed down is an interesting way to characterize it.

 

There are pockets of strength, but consumers revolving credit balances have soared and lower-end consumer demand has cratered. CRE defaults are startinf to happen right and left in top-tier cities further constraining banks that are already illiquid and potentially insolvent. Home prices are flat to down YoY (real returns are significantly negative), PMIs are sub-50 signalling both local and global contraction, and leading indicators have been falling for like ~16-17 months now. 

 

The primary strengths seem to be equities (absurdly high relative to bond yields and their underlying profits), consumer spending (only when ignoring its funded by increasing revolving credit), and GDP (which has been significantly at odds with GDI for months now). 

 

It's probably better characterized as stagnating - not "barely slowed".  A lot of signs are pointing to continued weakness in addition to what we've already seen. 

 

1-year ago the Fed Funds was 1.5%.

6-months ago Fed Funds was 4.25%.

WE know these things act with a lag so perhaps all were seeing now are the effects of rates surpassing 3ish%. Perhaps we do get to 6.5% on the front end, but I think it'll be seen as a policy mistake in hindsight and the bond market is sniffing that out which is why the 10-year has gone nowhere in 9 months despite significant hiking activity at the front end. 

[Kupotea]

30 minutes ago, TwoCitiesCapital said:

 

Barely slowed down is an interesting way to characterize it.

 

There are pockets of strength, but consumers revolving credit balances have soared and lower-end consumer demand has cratered. CRE defaults are startinf to happen right and left in top-tier cities further constraining banks that are already illiquid and potentially insolvent. Home prices are flat to down YoY (real returns are significantly negative), PMIs are sub-50 signalling both local and global contraction, and leading indicators have been falling for like ~16-17 months now. 

 

The primary strengths seem to be equities (absurdly high relative to bond yields and their underlying profits), consumer spending (only when ignoring its funded by increasing revolving credit), and GDP (which has been significantly at odds with GDI for months now). 

 

It's probably better characterized as stagnating - not "barely slowed".  A lot of signs are pointing to continued weakness in addition to what we've already seen. 

 

1-year ago the Fed Funds was 1.5%.

6-months ago Fed Funds was 4.25%.

WE know these things act with a lag so perhaps all were seeing now are the effects of rates surpassing 3ish%. Perhaps we do get to 6.5% on the front end, but I think it'll be seen as a policy mistake in hindsight and the bond market is sniffing that out which is why the 10-year has gone nowhere in 9 months despite significant hiking activity at the front end. 

Not to mention that with the rapid decrease in headline CPI you have real yields soaring. Hard to see how this doesn’t cascade into a credit crunch unless the FED does an about face soon.

[Gregmal]

The problem is everyone is a total expert on telling us, with 100% certainty whats happened already. I love talking to folks who go on about money printing bubbles, Fed puts, FOMO, TINA investing, etc....It was so easy for the past decade right? Forget all that happened in between, the debt crisis, flash crashes, pandemic, and late 2011/2018/2022/2023 Great Depressions that weren''t....forget that....I just ask them..oh so you must have made a total killing knowing all this as it was happening and been levered to the gills on the most speculative corners of that market, right? 100% of the time the answer is...no I held cash, gold, puts, etc.....LOLz...Ok genius, you KNEW IT ALL, had the playbook, and did the EXACT OPPOSITE of what you shouldve done? Nice!

 

Folks complicate the shit out of investing. If your focus is the next day/week/year and thats your horizon...yea go for it. Own bonds. If its longer than that...stocks offer pretty decent opportunity, especially if you want to look at specific names. 

[Gmthebeau]

1 hour ago, TwoCitiesCapital said:

 

Barely slowed down is an interesting way to characterize it.

 

There are pockets of strength, but consumers revolving credit balances have soared and lower-end consumer demand has cratered. CRE defaults are startinf to happen right and left in top-tier cities further constraining banks that are already illiquid and potentially insolvent. Home prices are flat to down YoY (real returns are significantly negative), PMIs are sub-50 signalling both local and global contraction, and leading indicators have been falling for like ~16-17 months now. 

 

The primary strengths seem to be equities (absurdly high relative to bond yields and their underlying profits), consumer spending (only when ignoring its funded by increasing revolving credit), and GDP (which has been significantly at odds with GDI for months now). 

 

It's probably better characterized as stagnating - not "barely slowed".  A lot of signs are pointing to continued weakness in addition to what we've already seen. 

 

1-year ago the Fed Funds was 1.5%.

6-months ago Fed Funds was 4.25%.

WE know these things act with a lag so perhaps all were seeing now are the effects of rates surpassing 3ish%. Perhaps we do get to 6.5% on the front end, but I think it'll be seen as a policy mistake in hindsight and the bond market is sniffing that out which is why the 10-year has gone nowhere in 9 months despite significant hiking activity at the front end. 

retail sales still look pretty strong.  The consumer drives most of the economy. Unemployment not moved.  CRE defaults won’t bring down inflation.  The easy inflation comps are done, now they have the hard work of bringing it down to 2%.  If they don’t it will just ramp back up.  I think the bond market will be proven wrong and rates go higher but that’s definitely not the consensus view.

[tede02]

Bond yields are moving back toward their highs. Will be interesting to see how equities respond. 

[rogermunibond]

Anyone have thoughts on super long date debt?  2040-2050 notes are yielding as much as 5.8-6% from fairly good A credits.

[thepupil]

17 minutes ago, rogermunibond said:

Anyone have thoughts on super long date debt?  2040-2050 notes are yielding as much as 5.8-6% from fairly good A credits.

 

So i was into this stuff late last year when it started getting to these type of levels. Stuff like SHW 4's of 2042. Sherwin Williams isn't going anywhere and you're buying at the highest yielding (20 yr) part of the 10-30 yr curve with some credit/liquidity spread and you get to 5.9% YTM / $78. It doesn't seem terrible, my. The problem is when you go to buy and to sell, the t-costs aren't great, so you have to be prepared to lose a few points on the way in / out, this doesn't matter if you're actually intending to hold long term, but I found that when duration/spreads rallied, I made 8 points instead of 12 points and found myself wondering if I'd have just been better off buying more liquid things like tsy futures or calls thereon. 

 

I'm looking to extend duration of my parents bonds portfolio and probably will be picking up some stuff like this, but they use Fidelity which is absolutely terrible at bonds...a simpler solution may just to be to buy the Vanguard fund VWETX w/ an SEC yield of 5.2% as of 8/10 and probably a little higher now. 

 

also think LT TIPS are interesting. Why should the government give investors  2% real risk free, and the ability to lock that in for 30 years? it just doesn't seem to make sense to me. 30 yr TIPS yeields are highest they've been since 2010. while they debuted at 4% REAL in the late 90's (an amazing opportunity to jus tlock in all one needed in hindsight), still think 2% real is pretty good for a portion of a retiree's capital. 

 

 

All this is said in the context of a tax deferred accounts, not taxable. 

Edited August 14, 2023 by thepupil

[Intelligent_Investor]

20 hours ago, rogermunibond said:

Anyone have thoughts on super long date debt?  2040-2050 notes are yielding as much as 5.8-6% from fairly good A credits.

20 year GSEs at 6%, but at that holding period I would want equity like returns.

[TwoCitiesCapital]

21 hours ago, rogermunibond said:

Anyone have thoughts on super long date debt?  2040-2050 notes are yielding as much as 5.8-6% from fairly good A credits.

 

I don't like long corporates at these levels. Sure, you're getting attractive rates because treasuries are high, but then just buy treasuries. IG corporate spreads are still pretty tight and not terribly attractive.

 

I'm primarily only buying spread products at the short end of the curve to boost returns by 1-2% without taking long-term corporate spread risk. 

 

21 hours ago, thepupil said:

 

So i was into this stuff late last year when it started getting to these type of levels. Stuff like SHW 4's of 2042. Sherwin Williams isn't going anywhere and you're buying at the highest yielding (20 yr) part of the 10-30 yr curve with some credit/liquidity spread and you get to 5.9% YTM / $78. It doesn't seem terrible, my. The problem is when you go to buy and to sell, the t-costs aren't great, so you have to be prepared to lose a few points on the way in / out, this doesn't matter if you're actually intending to hold long term, but I found that when duration/spreads rallied, I made 8 points instead of 12 points and found myself wondering if I'd have just been better off buying more liquid things like tsy futures or calls thereon. 

 

Yea - transaction costs are problematic - particularly for lot sizes below 50-100k. 

 

I primarily use funds/ETFs for my fixed income exposure for that exact reason. 

 

1 hour ago, Intelligent_Investor said:

20 year GSEs at 6%, but at that holding period I would want equity like returns.

 

As long as rates drop at some point in the next 1-3 years, you'll absolutely get equity like returns from these. I'm expecting double digit like returns from mortgages for the next 2-3 years (perhaps front loaded). Agency mortgages are the only spread product I'm taking any duration on AND I'm buying mortgage REITS to lever up the portfolio on my behalf. 

Edited August 15, 2023 by TwoCitiesCapital