I don’t understand one thing: if the yield continues to rise (with Fed’s rate), the 10-years bond price may decline further for long term. Why should we buy bonds now while the price may crash further?
2y yields are already pricing the Fed to almost reach 4% and basically stay there throughout 2023. To see further upside from here, you need to see either strong growth (strongly doubt) or such an upside in inflation that forces the Fed to be even more restrictive.
Even if that happens, that means much worse growth and inflation in year 2 to year 10 as they choke economic growth => yield curve inverts further, and even if 2y yields go up a bit more, 10y yields won't move much.
I have a question: If you think that these bonds (2Y, 10Y) won't move much anymore, and that their yield is lower than inflation: Is the goal to minimize your losses? Or don't you intend to hold them for the full duration?
If yield is lower than inflation, one loses "purchasing power", that's what I hear all the time. Can you expound a bit on your thought process?
The 10 year bond can trade below Fed Funds. I've looked this up, it's happened 6 or 8 times in the last century. So you could theoretically have Fed Funds at 4% and the 10 year is trading at 3.3% give or take. I wrote a short article about it here... Tl;Dr, the 10 year can easily trade 50 or 75 basis points below Fed Funds.
That makes sense. I invested in IEF before and was surprised by lack of performance, till I realized that it was carrying a lot of shorter duration paper.
That's a good question that I don't have an answer for. Macro Alf would probably know. I elected to buy TLT because it's easy, I can buy it in any amount I want, and the expense ratio is quite low. 0.15% per year.
It seems like you pay a big premium to buy TLT. You'd have to pay about 14 bucks more to have a basket of 30y bonds whereas you'll get a discount buying a bond. Plus you get O expense ratio.
You could well be right. Look, the thing is I'm new to the bond market. Dipping my toes in, as it were. TLT is easy, I can do it from my brokerage account, I've heard many investors I respect talk about TLT, so I bought it.
Bonds aren't really my focus in life. They are a sideshow that's interesting right now because interest rates are doing all sorts of wonky shit, but long term I just don't care that much.
That being said, if I do get more serious about bonds, I will investigate the possibility of buying them directly and whether that makes sense.
I am also no expert in bonds and the odds of one of the above outperforming the other when they might not even be profitable trades, along with research for the optimal instrument and the right broker, etc. when it's no more than a small percentage of my portfolio... just aren't worth my time. I am also not long bonds yet (my technicals don't support it), but I will do TLT for sure, as it's already available and quite accessible.
People will buy bonds to flee to safety at the expense of stocks. It offers a positive nominal return versus cash (losing purchasing power at the rate of inflation). Holding cash is a defensive position to buy in when stocks cheapen sufficiently.
Συμφωνώ απολύτως. Η έκφραση καθαρής γνώμης καί όχι η δημοσιογραφική φιλολογία , είναι αυτό πού κάνει τόν Αλφόνσο νά ξεχωρίζει ανάμεσα από χιλιάδες πολυλογάδες αναλυτές. Επικρωτώ τήν λέξη ΓΝΩΜΗ . Όλοι οί άλλοι έχουν άποψη . Άλλο η υπεύθυνη γνώμη επί συγκεκριμένου θέματος καί άλλο η άποψη. Άποψη έχουν καί οί χαζοί.
I’m still curious to see how the Fed responds once tax receipts fall (off a cliff seemingly) and the Treasury must continue to issue debt at new higher (unsustainably higher) interest rates - and the dollar wrecking ball continues to encourage triggers to monetary geopolitical instability around the world. Michael Kao has a good Twitter thread speculating on the likelihood of Asian contagion 2...
Spent a year listening to macro appreciating we are at "end times" and that as a lay person I needed to get clued up for purposes of wealth preservation. I didn't bother going in on the last rally because it seemed obvious that Fed was nowhere near pivoting and Earning bottom on a recession (irrespective of definition) was yet to ride in on the back. Feeling chipper this evening.
On another note, Alf would love you to tackle CBDCs at some point. Great Reset/WEF trending everywhere on Twitter. People are joining the dots. Obviously politics not necessarily your baileywick, but fascinated that Danielle deMB is saying Powell is against; Democrats for. Clearly CBDCs could undermine commercial banks by walking around them direct to the people. There is inherent tension here, but no one in the macro world is talking about it. Meanwhile, all CBs quietly preparing ....
One thing I find interesting about CBDCs, at least in America, is that they would be devastating to private banks. It would destroy their ability to kill money. So I would expect a large fight from the big banks, and if there's one thing we know it's that their political influence is high.
There are plenty of things things happening around Washington DC these days. If you Google, there are plenty of papers out by sophisticated individuals going in depth on the challenges of issuing a central bank dealing currency at these times. It’s a fun endeavor to get involved with, however
Thanks Alf. I appreciate the cyclical argument but won't things like energy remain good bets due to supply issues and discretionary be more at risk as people cut back on wants and focus more on needs like staying warm and food?
I guess we'll see in 24 days, will it be 50 or 75. Are they jawboning or are they serious? And they better hope energy doesn't turn, because there's plenty that will remain sticky. At least the money supply is flat for 4 months now.
Al has called this correctly, right from the beginning. He did this even as so many others kept telling us about what they believed was Powell's "softening" of his position. Al has proven that he is not just another pretty face, and that we really should take him seriously.
My guess is, that if he is correct about a six percent unemployment rate on the horizon, then real estate rental market ROI is in for an ugly slide. If that happens, then CAP rate could get ugly, and there will be added downward pressure on investment real estate. That, along with rising short term rates, will be a punch in the gut for vacant land prices.
"..build up exposure if 10y Treasuries trade in the 3.25-3.50%" Grazie for confirming my sense that this is the upper bound. Still uncertain if U.S. treasuries hold or trade. But agree in this market these offer value albeit moving carefully.
This is amazing work. I’ve been a full-time investor now for the past five years. My first three years have been difficult. But these last two years I’ve created amazing strategies and insight from a macro perspective that leads me to better trade on a short-term technical timeframe. Every day I’m learning something new here, and like you said in the previous write up, true wisdom is knowing that you know nothing. I love these reports, thank you as always!
Employment is full and employers are crying out for staff. Zombie companies have been allowed to rumble along, suppressing free labour. Conditions tightening won’t necessarily equate to rising unemployment, we need the productive job vacancies to be filled first. Only then will wage inflation be tempered. It’s going to be a difficult transition (not least politically) but surely slaying the zombies has to be the way out of this?
So Alf you are positive that when those high rates break something they will not cry uncle and pivot? Specially in an election year? The FED tends to change speeches way too fast.
Need to be careful with those clueless madafa**ers
I don’t understand one thing: if the yield continues to rise (with Fed’s rate), the 10-years bond price may decline further for long term. Why should we buy bonds now while the price may crash further?
2y yields are already pricing the Fed to almost reach 4% and basically stay there throughout 2023. To see further upside from here, you need to see either strong growth (strongly doubt) or such an upside in inflation that forces the Fed to be even more restrictive.
Even if that happens, that means much worse growth and inflation in year 2 to year 10 as they choke economic growth => yield curve inverts further, and even if 2y yields go up a bit more, 10y yields won't move much.
I have a question: If you think that these bonds (2Y, 10Y) won't move much anymore, and that their yield is lower than inflation: Is the goal to minimize your losses? Or don't you intend to hold them for the full duration?
If yield is lower than inflation, one loses "purchasing power", that's what I hear all the time. Can you expound a bit on your thought process?
I expect the total return (coupons + price changes) in TLT to outperform inflation over the next 12 months.
Also, as I expect other asset classes to struggle, TLT would serve as a portfolio stabilizer.
What about QT? Doesn’t that have any more impact?
The 10 year bond can trade below Fed Funds. I've looked this up, it's happened 6 or 8 times in the last century. So you could theoretically have Fed Funds at 4% and the 10 year is trading at 3.3% give or take. I wrote a short article about it here... Tl;Dr, the 10 year can easily trade 50 or 75 basis points below Fed Funds.
https://theunhedgedcapitalist.substack.com/p/back-in-the-bond-market-buying-tlt
That's correct, and it makes sense.
Fed Funds reflect today's nominal Fed stance, while 10y yields reflect the expectations for the next 10y of real growth and inflation.
If the Fed chokes the economy today, the next 10y are likely to be worse for growth and inflation on the margin.
Would you make more money buying the 30Y bond itself rather than the TLT etf?
In case yields go down, you would.
That's because the duration of TLT is slightly smaller than the duration of a 30y bond, as TLT replicates 20-30y bonds and not only 30y on the run
That makes sense. I invested in IEF before and was surprised by lack of performance, till I realized that it was carrying a lot of shorter duration paper.
That's a good question that I don't have an answer for. Macro Alf would probably know. I elected to buy TLT because it's easy, I can buy it in any amount I want, and the expense ratio is quite low. 0.15% per year.
It seems like you pay a big premium to buy TLT. You'd have to pay about 14 bucks more to have a basket of 30y bonds whereas you'll get a discount buying a bond. Plus you get O expense ratio.
You could well be right. Look, the thing is I'm new to the bond market. Dipping my toes in, as it were. TLT is easy, I can do it from my brokerage account, I've heard many investors I respect talk about TLT, so I bought it.
Bonds aren't really my focus in life. They are a sideshow that's interesting right now because interest rates are doing all sorts of wonky shit, but long term I just don't care that much.
That being said, if I do get more serious about bonds, I will investigate the possibility of buying them directly and whether that makes sense.
Cheers
I am also no expert in bonds and the odds of one of the above outperforming the other when they might not even be profitable trades, along with research for the optimal instrument and the right broker, etc. when it's no more than a small percentage of my portfolio... just aren't worth my time. I am also not long bonds yet (my technicals don't support it), but I will do TLT for sure, as it's already available and quite accessible.
People will buy bonds to flee to safety at the expense of stocks. It offers a positive nominal return versus cash (losing purchasing power at the rate of inflation). Holding cash is a defensive position to buy in when stocks cheapen sufficiently.
FWIW I'm staying in short bonds for now: 0-3 month US Treasuries ETF. I bought them mainly for the exposure to USD (I live in the UK).
I'm still wary of longer bonds, as I'm more of an inflationista, but I might bite if the 30 year reaches 3.5%.
Thank you for some clear and usable analysis. You don't waffle you actual give an opinion.
Συμφωνώ απολύτως. Η έκφραση καθαρής γνώμης καί όχι η δημοσιογραφική φιλολογία , είναι αυτό πού κάνει τόν Αλφόνσο νά ξεχωρίζει ανάμεσα από χιλιάδες πολυλογάδες αναλυτές. Επικρωτώ τήν λέξη ΓΝΩΜΗ . Όλοι οί άλλοι έχουν άποψη . Άλλο η υπεύθυνη γνώμη επί συγκεκριμένου θέματος καί άλλο η άποψη. Άποψη έχουν καί οί χαζοί.
Welcome, George!
If I wouldn't deliver experience and data-backed actionable opinions, what would I be here for otherwise? :)
I’m still curious to see how the Fed responds once tax receipts fall (off a cliff seemingly) and the Treasury must continue to issue debt at new higher (unsustainably higher) interest rates - and the dollar wrecking ball continues to encourage triggers to monetary geopolitical instability around the world. Michael Kao has a good Twitter thread speculating on the likelihood of Asian contagion 2...
Spent a year listening to macro appreciating we are at "end times" and that as a lay person I needed to get clued up for purposes of wealth preservation. I didn't bother going in on the last rally because it seemed obvious that Fed was nowhere near pivoting and Earning bottom on a recession (irrespective of definition) was yet to ride in on the back. Feeling chipper this evening.
On another note, Alf would love you to tackle CBDCs at some point. Great Reset/WEF trending everywhere on Twitter. People are joining the dots. Obviously politics not necessarily your baileywick, but fascinated that Danielle deMB is saying Powell is against; Democrats for. Clearly CBDCs could undermine commercial banks by walking around them direct to the people. There is inherent tension here, but no one in the macro world is talking about it. Meanwhile, all CBs quietly preparing ....
One thing I find interesting about CBDCs, at least in America, is that they would be devastating to private banks. It would destroy their ability to kill money. So I would expect a large fight from the big banks, and if there's one thing we know it's that their political influence is high.
An article on CBDC is definitely on the cards here!
There are plenty of things things happening around Washington DC these days. If you Google, there are plenty of papers out by sophisticated individuals going in depth on the challenges of issuing a central bank dealing currency at these times. It’s a fun endeavor to get involved with, however
Thank you; appreciated.
Thanks Alf. I appreciate the cyclical argument but won't things like energy remain good bets due to supply issues and discretionary be more at risk as people cut back on wants and focus more on needs like staying warm and food?
Yes, this is a concrete risk - some commodities like oil, agris, natgas could remain tight for a bit longer.
Fantastic as always Alf, thank you.
Too kind :)
I guess we'll see in 24 days, will it be 50 or 75. Are they jawboning or are they serious? And they better hope energy doesn't turn, because there's plenty that will remain sticky. At least the money supply is flat for 4 months now.
They are serious, I think.
I think they're serious about not pivoting . He had to correct that interpretation. I think they're still hoping they don't have to go too far.
Next few months will be interesting but tricky, tactically.
Flattener or barbell? We'll see.
Al has called this correctly, right from the beginning. He did this even as so many others kept telling us about what they believed was Powell's "softening" of his position. Al has proven that he is not just another pretty face, and that we really should take him seriously.
My guess is, that if he is correct about a six percent unemployment rate on the horizon, then real estate rental market ROI is in for an ugly slide. If that happens, then CAP rate could get ugly, and there will be added downward pressure on investment real estate. That, along with rising short term rates, will be a punch in the gut for vacant land prices.
Thanks, but am I really a pretty face? ahah :)
I will write an update about real estate markets soon.
Alf, I love reading your stuff. An update on RE would be great!
Meant to write "Alf" and not Al. .Sorry
"..build up exposure if 10y Treasuries trade in the 3.25-3.50%" Grazie for confirming my sense that this is the upper bound. Still uncertain if U.S. treasuries hold or trade. But agree in this market these offer value albeit moving carefully.
Bear in mind that as always, I can be wrong
I have had abundant experience with that myself.
He who says he hasn't, he's a charlatan :)
Haha don't we all
Hi alf, newbie here, could you please explain that 1.5 sigma, 2 sigma thing? How is it calculated? I couldn't get it.
Don't worry Shaun, I am working on tools that will allow you to do these calculations in order to size your positions more accurately
Alf, the work you are doing here is fantastic!
I enjoy your interviews very much, and I will be digging into all of your materials.
Thank you again so much!
You are welcome, Carlos!
This is amazing work. I’ve been a full-time investor now for the past five years. My first three years have been difficult. But these last two years I’ve created amazing strategies and insight from a macro perspective that leads me to better trade on a short-term technical timeframe. Every day I’m learning something new here, and like you said in the previous write up, true wisdom is knowing that you know nothing. I love these reports, thank you as always!
Glad they are helping you, Vladlen!
Employment is full and employers are crying out for staff. Zombie companies have been allowed to rumble along, suppressing free labour. Conditions tightening won’t necessarily equate to rising unemployment, we need the productive job vacancies to be filled first. Only then will wage inflation be tempered. It’s going to be a difficult transition (not least politically) but surely slaying the zombies has to be the way out of this?
Yep, I think your take is correct.
George Kanakis
Ευχαριστώ για το "λαικ" σου. Δεν είναι λίγη η αναλυτές που εκφράζονται με φιλολογία μόνο και μόνο να φανούν αργότερα να έχουν κάνει λάθος.
So Alf you are positive that when those high rates break something they will not cry uncle and pivot? Specially in an election year? The FED tends to change speeches way too fast.
Need to be careful with those clueless madafa**ers
Fair point, so always important to watch out and be nimble.
I'll keep updating you guys on my views.
Excellent comment; thanks Alf and I totally agree
Glad you liked it, Ian!