Bonds!

[tede02]

I've been nibbling on 10-year notes when the yield has pushed north of 4%. But this is small dollar stuff. It's money that would otherwise be in some-type of cash equivalent. If rates fall, I'll celebrate the capital gain. If rates rise, I'll shrug my shoulders and hold on. I'll call it a barbell approach.

Edited August 15, 2023 by tede02

[Gmthebeau]

On 8/14/2023 at 3:11 PM, 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. 

 

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. 

 

30 year tips at current levels could make a lot of sense for retirees, or others wanting to duration match.

 

[thepupil]

On 8/15/2023 at 1:56 PM, TwoCitiesCapital said:

 

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. 

 

 

 

Well, I capitulated today and bought a fair bit of corporate bonds where I had liquidity (in my taxable account). 2% in the Bowdoins and Essex (the safest IMO) and about 1% in each of the others. ~10% collectively.

 

After tax these only yield about 3.5% but they service my mortgage and have duration upside. Along w/ a slug of ET floaters I have, my corporate bond basket yields 7.7% pre-tax / 4.4% after tax. I own about 32% of my mortgage amount in this basket. Pre-tax is pays about 88% of my pre-tax mortgage interest. Admittedly that's heavily subsidized by the 10% yielding ET notes whihc have a much worse credit risk profile than the others. 

 

Every time I've done this, rates go back down and prevent me from deploying real money in bonds. Maybe this time is different and I'll start getting 7% on safe long duration stuff...I like having lots of line items / credits and would just add names like 5-10 at a time. this increases t-costs though. Would re-iterate the better approach may be treasuries or a fund. 

 

Bowdoin 4.69% of 2112 @ $78 / 6% / +163 to the 30 yr.

ESS 4.5% of 2048 $76.7 / 6.37% / +188 to the int tsy

META 5.75% of 2063 / $96.8 / 5.96% / +157 

BNSF 5.15% of 2043 / $94/2 / 5.6% 

MO 5.95% of 2049 / $90 / 6.75%

SHW 4% of 2042 / $77 / 5.9%

KIM 4.25% of 2045 @ $75 / 6.4%

 

 

 

Edited August 17, 2023 by thepupil

[Spekulatius]

2%+ real bond yields (after inflation) with TIPS, who would have thought?

https://finance.yahoo.com/news/the-stock-market-has-a-real-problem-morning-brief-100027846.html

[tede02]

2 hours ago, Spekulatius said:

2%+ real bond yields (after inflation) with TIPS, who would have thought?

https://finance.yahoo.com/news/the-stock-market-has-a-real-problem-morning-brief-100027846.html

 

I've never bought TIPS but I'm seriously thinking about it. I was going to dig into it more this week to make sure I understand the basics. 

 

What's striking is how the media narrative has dramatically shifted over the last few weeks as rates have gone up. Now I see headlines everywhere that "rates are higher for longer," etc. I don't think anybody has a clue. 

[Gregmal]

Just in general worrying about 25 to 50 basis point moves in anything is dumb. But their job is to generate interest. So it’s a big deal for us according to them, I guess. 

[UK]

 

[Spekulatius]

1 minute ago, UK said:

 

Maybe not as good but in an diversified portfolio, Shannon's demon should help.

it did not work in 2021, because bonds were totally overvalued, but we have a different situation now. Bonds are the best relative value to stocks since more than 20 years ago.

[thepupil]

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. 

Edited August 22, 2023 by thepupil

[TwoCitiesCapital]

39 minutes ago, 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. 

 

+1 

 

 

[dealraker]

My wild guess is that both stocks and bonds in general are not good buys or holds currently, but bonds may have the edge.  Probably the first time in a long while someone like me would chirp a bit with such a subject as this- but it seems likely.

 

A few weeks ago I nearly liquidated by small retirement account except for a couple of stocks.  I also sold a bunch of smaller holdings in the taxable account, stocks that to me have little to no advantage over peers in any way.

 

Of course when the Brookfield bunch nudged ever so slightly higher, as I mentioned earlier, I sold all of them which to me is simply a good riddance.  

 

First time in my life I've sold in such a manner, but raising funds for a land purchase changed my theme.  

[Gregmal]

Idk I just recall that for years folks begged for a stock pickers market and now we have a pure stock pickers market. And? Bonds? Come on.

[thepupil]

4 minutes ago, Gregmal said:

Idk I just recall that for years folks begged for a stock pickers market and now we have a pure stock pickers market. And? Bonds? Come on.

 

So if you had to pick a number for the delta between 100% VTSAX and 70% VTSAX / 30% VBTLX , over the next ten years, what would it be? Is it greater than say 1-2%/yr?  If so why? 

 

I suspect you will say "who cares?" to which I would respond, "anyone w/ a 401k". I care about index returns for about $70K/yr. It's material to me. It may not be material to you. But I also care about it for the portion of my portfolio I control. I don't have a high degree of confidence in generating HUGE outperformance/high absolute returns. A certain 5-6-7% / yr with consistent carry and low risk of nominal capital impairment is a nice tool to have. It's not THE tool, but it's A tool. 

[dealraker]

5 minutes ago, Gregmal said:

Idk I just recall that for years folks begged for a stock pickers market and now we have a pure stock pickers market. And? Bonds? Come on.

You pick 'em Greg...I'll buy! 

[LC]

3 hours ago, tede02 said:

What's striking is how the media narrative has dramatically shifted over the last few weeks as rates have gone up. Now I see headlines everywhere that "rates are higher for longer," etc. I don't think anybody has a clue. 

Has anyone ever had a clue? 

[james22]

Anyone ever consider BAC-L and WFC-L as a bond (or annuity) alternative?

 

https://www.philosophicaleconomics.com/2017/03/a-value-opportunity-in-preferred-stocks/

 

Yielding 6.34% and 6.38% today.

[drzola]

james22  I have own both these bonds for over 5yrs  in my CDN Registered Accounts and some my inlaws RRIF

[TwoCitiesCapital]

How do people think about preferreds? 

 

You don't get the same upside as equities nor do you get the same downside protection as bonds. Giving up both in exchange for a yield pick-up relative to both (typically). 

 

Obviously, if you think things will go well you buy the equity and if things go south you'd prefer to own the bonds. Do people just buy preferreds when they don't have a strong view either way? Or is it just a way to take some risk while remain "hedged" from a ton of damage downside scenario? 

 

Just trying to understand how these should fit in repertoire and when I should view them as attractive relative to the equity/debt? 

Edited August 24, 2023 by TwoCitiesCapital

[CorpRaider]

1 hour ago, james22 said:

Anyone ever consider BAC-L and WFC-L as a bond (or annuity) alternative?

 

https://www.philosophicaleconomics.com/2017/03/a-value-opportunity-in-preferred-stocks/

 

Yielding 6.34% and 6.38% today.

I own some of one of those.

[james22]

I'm uninterested in anything callable, TwoCitiesCapital.

 

What was your purpose in buying the preferreds, drzola? CorpRaider? Happy with how they've performed? You'd buy them again?

 

 

[tede02]

15 hours ago, TwoCitiesCapital said:

How do people think about preferreds? 

 

You don't get the same upside as equities nor do you get the same downside protection as bonds. Giving up both in exchange for a yield pick-up relative to both (typically). 

 

Obviously, if you think things will go well you buy the equity and if things go south you'd prefer to own the bonds. Do people just buy preferreds when they don't have a strong view either way? Or is it just a way to take some risk while remain "hedged" from a ton of damage downside scenario? 

 

Just trying to understand how these should fit in repertoire and when I should view them as attractive relative to the equity/debt? 

 

I've come to find preferreds interesting and overlooked by the markets. I think part of it has to do with retail investors not understanding them and also the fact that low volume may keep large institutional buyers away. I like them as a way to get both income and some equity like returns when something is beaten down, with less risk. For example, I own both the common and preferreds in SRG. My common investment is going to be a big loss. But my preferred investment is going to end up as a strong double digit annualized return with my average price being around $18 vs. $25 par plus the $1.75 in annual dividends I've been collecting. 

 

I also grabbed some SYF preferreds in March when the banks sold off. The price is basically unchanged today. The preferred sells for $16.30 vs $25 par and pays $1.40 in dividends (over 8% yield). In March, the common looked cheap but I hadn't done deep analysis on SYF. I figured the preferred was a safer way to get some exposure (albeit was a small bet). 

 

[CorpRaider]

On 8/24/2023 at 9:56 PM, james22 said:

I'm uninterested in anything callable, TwoCitiesCapital.

 

What was your purpose in buying the preferreds, drzola? CorpRaider? Happy with how they've performed? You'd buy them again?

 

 

 

@james22 Sorry just saw this.  My simplistic analysis was base rate: I'm getting a common equity like historical return via the expected yield (~6.5%) with decreased downside (I speculate that most likely worst downside scenario for SIFIs is common gets wiped and forced equity raises; I lose non-cumulative dividend for a period). 

 

So, if U.S. SIFIs are now mediocre over-capitalized utilities (like WTF they're going to make SIFIs hold more capital because SVB blew up?), that cash yield is probably a better return than the common (or at least "shorter duration"). 

 

Also, I have the ability to participate in big right tail outcome/upside surprises (e.g., it comes to pass that these SIFIs are new Canadian banks circa 1980-something) because of the conversion rights. 

 

I think I just basically described all of the standard features of any convertible preferred equity security with no real insight. haha.

 

 

Edited August 30, 2023 by CorpRaider

[TwoCitiesCapital]

I think this is right. 

 

Even if we assume equity earnings grow 10% per annum without interruption, and there is no loss of return from contracting multiples, you come out significantly ahead over the next 5-7 years with a core bond fund with YTMs in the 6+% where you can reasonably expect to lock in yields for much of that time. 

 

No reduction in rates or contracting multiples needed. For equities to win, you need earnings growth dramatically in excess of 10% per annum OR expansion of multiples well beyond the current 30x. I'm not comfortable banking on either. 

 

Perhaps adding some preferred at a discount to par can provide some credit-like spread exposure that is more attractive than locking in long-term credit spreads at the moment. 

 

 

 

[Red Lion]

23 minutes ago, TwoCitiesCapital said:

I think this is right. 

 

Even if we assume equity earnings grow 10% per annum without interruption, and there is no loss of return from contracting multiples, you come out significantly ahead over the next 5-7 years with a core bond fund with YTMs in the 6+% where you can reasonably expect to lock in yields for much of that time. 

 

No reduction in rates or contracting multiples needed. For equities to win, you need earnings growth dramatically in excess of 10% per annum OR expansion of multiples well beyond the current 30x. I'm not comfortable banking on either. 

 

Perhaps adding some preferred at a discount to par can provide some credit-like spread exposure that is more attractive than locking in long-term credit spreads at the moment. 

 

 

 

 

 

Can you help me understand this? It seems that if equity earnings grow 10% per annum and there's no multiple contraction, then you'd earn 10% + the dividend yield = 11.5% per annum return, how could a 5-7 year core bond fund with YTM in the 6s outperform that? 

 

I can certainly see bonds outperforming, but that would involve a multiple contraction or significantly lower earnings growth than 10% per year, both likely outcomes in my opinion. 

[thepupil]

32 minutes ago, TwoCitiesCapital said:

I think this is right. 

 

Even if we assume equity earnings grow 10% per annum without interruption, and there is no loss of return from contracting multiples, you come out significantly ahead over the next 5-7 years with a core bond fund with YTMs in the 6+% where you can reasonably expect to lock in yields for much of that time. 

 

No reduction in rates or contracting multiples needed. For equities to win, you need earnings growth dramatically in excess of 10% per annum OR expansion of multiples well beyond the current 30x. I'm not comfortable banking on either. 

 

Perhaps adding some preferred at a discount to par can provide some credit-like spread exposure that is more attractive than locking in long-term credit spreads at the moment. 

 

 

 

 

disagree. If earnings grow 10%/yr w/o interruption then stocks will make ~11%/yr over next 7 yrs. If exit @ 15x vs current 20x then ~7.2%/yr.

In both cases that beats bonds (if we assume one earns the YTM over the 7 ish years of duration.  

 

I like bonds but this math doesn't make any sense to me.