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Where will bond yields top out?


tede02

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This is mostly for fun because it's a lot like asking where stocks will bottom. I don't claim to have any special insight here so take what I say as conjecture. But I'll be surprised to see the 10-year beyond the 4-5% range. I think the economy is going to break before that happens. The Fed is under so much pressure to act right now. I'm expecting them to tighten aggressively. I wouldn't be surprised, looking back, if the recession has already started. 

Edited by tede02
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Well, I’m betting Powell means business when it comes to snapping inflation.
 

So, in that case, the Fed will push rates to 3%.

 

In the meantime, certain highly speculative sectors of the economy will go into full cardiac arrest (SPACs). We’ll all feel the pain of speculators panicking and selling good equities like BRK to cover their margin calls, fuel costs, grocery bills and rent.

 

Depending on how hard-assed the Fed wants to be the pain could last from several months to several years.

 

(Fairfax will buy a few billion worth of high grade corporates and munis in the 5% to 6% range. Investors will appreciate a few hundred mil or so of added interest income, but will also fault Prem for not going all in at the peak - even though FFH will be set up to earn materially more than it does today. And, Prem will shrug it all off because he’ll still be a big swinging billionaire.)

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I have a hard time seeing how the 10 year gets much above 4%. Perhaps if inflation continues to run hot into Sept/Oct. My guess is something breaks before then (4% or if it goes higher). But pretty much everyone has been way too low with their interest rate estimates this year.

Edited by Viking
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Lot higher than 3-4%.

The mandate is a low target rate of inflation, not management of the economy; breaking the glassware is part of the creative destructive process. We would all be a lot better off with a hard and fast crash wiping out the exotics, and a fast entry into the new infra-structure build (grid, EV, etc.). Moral Suasion is such a bitch!

 

SD

 

Edited by SharperDingaan
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9 hours ago, Viking said:

I have a hard time seeing how the 10 year gets much above 4%. Perhaps if inflation continues to run hot into Sept/Oct. My guess is something breaks before then (4% or if it goes higher). But pretty much everyone has been way too low with their interest rate estimates this year.

4% risk free means that corporate bonds in the BBB- range trade at 7%, maybe higher if spreads go up. I think it will be enough to slow down the economy.

 

One thing to keep in mind is that Powell just got re-confirmed and is pretty safe, especially with inflation being front and center with both parties and in the headline news.

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Anyone still follow PFIX? I bought a little last year when there was some discussion about it. Made sense to me and the product seemed cool. However it’s only gone from 40 ish when the 10 year was like 1.3-1.5 to now 63. It was marketed as basically the Bill Ackman type swap trade with huge payout. Am missing something. Wouldn’t be the first time some product underwhelms.

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13 hours ago, Gregmal said:

Anyone still follow PFIX? I bought a little last year when there was some discussion about it. Made sense to me and the product seemed cool. However it’s only gone from 40 ish when the 10 year was like 1.3-1.5 to now 63. It was marketed as basically the Bill Ackman type swap trade with huge payout. Am missing something. Wouldn’t be the first time some product underwhelms.

 

I don't know if you'll ever get that type of leverage in a retail/consumer product. You'd probably have to buy options on the ETF that owns the swaptions to approximate something similar to Ackman's trade. 

 

I'd say getting a 50+% return is about right for the targeted duration on the interest rate swaps.

 

Also, IIRC, the bulk of the collateral for the swaps is held in TIPS which have been falling with rising rates so you have a small headwind there. 

Edited by TwoCitiesCapital
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7 minutes ago, TwoCitiesCapital said:

 

I don't know if you'll ever get that type of leverage in a retail/consumer product. You'd probably have to buy options on the ETF that owns the swaptions to approximate something similar to Ackman's trade. 

 

I'd say getting a 50+% return is about right for the targeted duration on the interest rate swaps.

 

Also, IIRC, the bulk of the collateral for the swaps is held in TIPS which have been falling with rising rates so you have a small headwind there. 

Ya im not complaining but its a complex product and last thing I want, although I doubt it will occur, is some of the TVIX type malfunctions LOL. Like 2014 TVIX problems. 

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I purchased PFIX as a hedge earlier this year. I hear your point. My impression is bond yields are moving into the range where the convexity starts to really show. The strikes on the underlying derivatives are at 4 & 4.25%. 

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I saw the news this morning on an emergency ECB meeting regarding sovereign debt yields spiking. That seemed to come out of left field. That's all the world needs...another debt crisis. Puts the ECB in quite a bind. How do you fight inflation and surging gov bond yields simultaneously?

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9 minutes ago, tede02 said:

I saw the news this morning on an emergency ECB meeting regarding sovereign debt yields spiking. That seemed to come out of left field. That's all the world needs...another debt crisis. Puts the ECB in quite a bind. How do you fight inflation and surging gov bond yields simultaneously?

 

You let inflation exceed rates for a LONG time while jawboning about trying to prevent inflation. 

 

Negative real rates are here to stay globally. Too much debt to be managed otherwise. 

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3 hours ago, TwoCitiesCapital said:

 

You let inflation exceed rates for a LONG time while jawboning about trying to prevent inflation. 

 

Negative real rates are here to stay globally. Too much debt to be managed otherwise. 

5% interest rates would still be negative with 8% inflation, that's the issue. We are likely going from negative to less negative and even that is a problem.

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Idk but it just seems bizarre how obsessed everyone is with this. Inflation is not currently 8%. It wasn’t last year either. As they measure it, they significantly missed measuring price increases that occurred last year. Now this year, the are giving us numbers based off wrongly advertised numbers. It doesn’t matter what Mays print was, it matters what it is going forward. So we can say “inflation” is 8% all we want and then compare it to forward rate expectation, but going forward, inflation is not going to be anywhere near 8%. So sans the sensationalism, if rates are 3-4% going forward, and inflation is 5%, that’s a wee bit different than what some are advertising. 

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Plus, it seems energy, not rates is really the remedy. Higher energy prices lowers air travel, car prices, and probably consumption in general. My heating oil bill, if I was poor, let alone middle class or better, would be far more impactful than 1-2% I’d pay to borrow money. Everything is so backwards right now.

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4 hours ago, tede02 said:

I saw the news this morning on an emergency ECB meeting regarding sovereign debt yields spiking. That seemed to come out of left field. That's all the world needs...another debt crisis. Puts the ECB in quite a bind. How do you fight inflation and surging gov bond yields simultaneously?


it is impressive the speed financial markets are adjusting. Financial markets are pulling central bankers along - which is the safe course of action for central bankers (provides job security). Clearly Powell has no desire to be Paul Volker (and actually get out ahead of inflation). I head the perfect description of Powell: a chicken hawk.

 

Financial markets are moving fast and now we are starting to see signs of collateral damage: 

1.) looks like the crypto bubble has popped. $2 trillion… poof. Impact of all this wealth destruction? Too early to tell. But we will learn who has been swimming naked in due course.

2.) Italian (southern Europe?) bonds are shooting higher. This is a problem because unlike the US, Italy cannot handle much higher rates - Italy is a walking Zombie. What to do? ECB calls emergency meeting. Solution? There is none… 

 

There are lots of other examples of where the lack of global liquidity is biting and hard. The ironic thing is QT just actually started in the US today. We are likely in the second or third inning of a nine inning game… and investors are already worn out. 
 

i was underwhelmed with the questions in Powell’s presser today. NO DISCUSSION OF QT. NO DISCUSSION OF THE DRYING UP OF GLOBAL LIQUIDITY. Crypto exploding. This tells me most people have no idea what is happening. And what is coming.

Edited by Viking
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4 hours ago, Spekulatius said:

5% interest rates would still be negative with 8% inflation, that's the issue. We are likely going from negative to less negative and even that is a problem.

 

I agree - for now. It's only a matter of time before higher input prices and higher rates strangle economic activity. 

 

And then rates will go down to 0% again and inflation will rise in response to the inevitable stimulus and we'll have significantly negative rates again. The next decade will just be bouncing back and forth between less negative and more negative real rates IMO. 

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20 minutes ago, TwoCitiesCapital said:

 

I agree - for now. It's only a matter of time before higher input prices and higher rates strangle economic activity. 

 

And then rates will go down to 0% again and inflation will rise in response to the inevitable stimulus and we'll have significantly negative rates again. The next decade will just be bouncing back and forth between less negative and more negative real rates IMO. 

Is there a point where there is just a reset on the economic fronts? We had zilch of this precovid. So has Japan with 0 rates. The COVID responses across the world, fucked all this up. The supply chain, one by one, will correct. So while I’m open to what you’re saying, isn’t it much more likely that eventually Ford produces enough cars that the days of bidding wars and capital gains on vehicles is over permanently? Same with lumber, steel, and whatever other widgets are currently or recently an issue? Supply chains get congested, as COVID continued to be on again off again it got worse. So if we re past COVID crap, don’t they eventually normalize to precovid? 

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I say this because one thing I’m seeing right now, and I see it all the time in these instances, is the certain beliefs that have been wrong for a long time, get spirits and then all that came with those beliefs gets it’s 15 minutes of fame. The Fed punch bowl group spent 10 years saying bubble and today they still think we re going back to 2012 equity valuations because “finally” they think they are right. Same with the gold bugs re:inflation. It’s all plausible. But I also think some sort of hybrid and varied outcome is much more likely. We still should structurally have higher equity valuation than before. Governments will still be accommodative by and large. So to me, 2020-2022 was wild but not a case study for models. Isn’t the trend and pattern simply getting back to precovid? Give or take? I thought the market was pricey pre COVID. So maybe 10-15% lower than that if you ascribe to no value creation for 2 years? I agree there’s a lot of uncertainty. Which is why I think we re seeing so many ridiculous and outlandish predictions. It’s like bitcoin. Every time it goes down, the I told you so crowd who’s been wrong since $1000 says “see, I knew it!”. But it’s probably here to stay and gonna have a place and a lot of volatility like everything else? It doesn’t have to be a 0 or $1,000,000.

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1 hour ago, hasilp89 said:

@Viking how are you positioned for this?


@hasilp89 every investor is going to come at this differently. There is no one ‘way’. Because every investor has a

- unique personal situation (age, net worth etc)

- financial knowledge

- emotional makeup

- interest level/time to spend on all this stuff

- risk tolerance (that sleep well at night thing) 

 

For me, capital preservation is paramount. I have enough. Today, i am about 55% cash and 45% invested. BAC is currently my biggest position. FFH is #2. RECP (a trade) and GIL are next in size. I also own a few other stocks with smaller weightings. If we get a nice bounce higher in equities i will be happy to sell some equities and move back closer to 65-70% cash.
 

In a bear market not losing money (versus return) is a really good result. And i think we are in a bear market. I think the bear market will continue until the Fed reverses course (to easing) and that is NOT where we are today. So i am going to continue to be VERY patient. And i am VERY CONFIDENT that Mr Market is going to offer up some wonderful opportunities in the next 3-6 months. IT ALWAYS DOES. I have carried very large cash balances many, many times over the past 20 years and it has ALWAYS paid off. But like i said earlier, people have to find a strategy that works for them - there is no one size fits all when it come to successful investing. 

Edited by Viking
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