Bonds !!!

[blue_green_sparks]

It would be helpful to know the net leverage and call dates. I’m not a huge fan of the super long dated bonds because if rates go up you get murdered and if rates fall you get refinanced, but they become very interesting in distressed situations.  But I agree they do look interesting and with the S&P CAPE still very elevated and some risk of a lost decade for stocks I’m mostly buying bonds these days.

oh - I did not know about this! So if you buy a corp bond at 6% and rates drop, they just pay you off and refinance themselves to a 3% bond?

And then that is happening within all the bond funds, makes treasuries more attractive than I was thinking. And I was thinking they were getting pretty attractive, lol!

I'm gonna hold off a bit. Ten Year expected to peak next April, over 5% and then a slow rate decline out to '24.

[SilentC]

misty money it’s a bit more complicated than that and it varies a lot bond-by-bond.  You can protect yourself by buying bonds with call dates far into the future, or what I like to do is buy longer dated bonds that pay small coupons so they come at a discount to par and are less likely to be called.  For example maybe Company A has a 2029 bond with a 7% coupon trading at 99 and a 2030 bond with a 4% coupon trading at 82, I buy the one at 82 even if the yield to maturity is a little lower because if I get called I get paid 100 and the company is going to pay off the 7% coupon one first anyway.  Also if the company goes bankrupt you have more downside protection paying 82 vs 99.  (Hypothetical prices as I’m not in front of my computer, just assume yield to maturity on those are both about the same and a little lower on the 2030/82 bond.).

[ChpBstrd]

It would be helpful to know the net leverage and call dates. I’m not a huge fan of the super long dated bonds because if rates go up you get murdered and if rates fall you get refinanced, but they become very interesting in distressed situations.  But I agree they do look interesting and with the S&P CAPE still very elevated and some risk of a lost decade for stocks I’m mostly buying bonds these days.

oh - I did not know about this! So if you buy a corp bond at 6% and rates drop, they just pay you off and refinance themselves to a 3% bond?

And then that is happening within all the bond funds, makes treasuries more attractive than I was thinking. And I was thinking they were getting pretty attractive, lol!

On my brokerage's screener, I can filter for only those bonds which are non-callable. The vast majority of the bonds I see are non-callable. I agree with only buying non-callable bonds even though their yields are lower because you need that upside to offset risks to your stock portfolio and to protect your income from falling interest rates.

[clifp]

It would be helpful to know the net leverage and call dates. I’m not a huge fan of the super long dated bonds because if rates go up you get murdered and if rates fall you get refinanced, but they become very interesting in distressed situations.  But I agree they do look interesting and with the S&P CAPE still very elevated and some risk of a lost decade for stocks I’m mostly buying bonds these days.

oh - I did not know about this! So if you buy a corp bond at 6% and rates drop, they just pay you off and refinance themselves to a 3% bond?

And then that is happening within all the bond funds, makes treasuries more attractive than I was thinking. And I was thinking they were getting pretty attractive, lol!

On my brokerage's screener, I can filter for only those bonds which are non-callable. The vast majority of the bonds I see are non-callable. I agree with only buying non-callable bonds even though their yields are lower because you need that upside to offset risks to your stock portfolio and to protect your income from falling interest rates.

At Schwab there is a yield to worst, column on the bond  search menu.  This assume that bonds will be called at the earliest opportunity and in most case the yield you should pay attention to when choosing bonds..  I didn't know about call options when I first started buy Muni bonds in the late 1990s.   I thought I had a nice 5%+ tax-free yield, for the next 20+ years only to discover after 10 they mostly got called. 

[vand]

The 10Y/3M inverted in the last week - and at an alarming rate, too.

You can debate if we've been in a recession this year or not, but things are surely going to take a further lurch down based on historical precedent from this leading indicator.

https://fred.stlouisfed.org/series/T10Y3M

[GuitarStv]

Are we in a buying opportunity for bonds now?

[BicycleB]

Are we in a buying opportunity for bonds now?

You read my mind

[Mr. Green]

Are we in a buying opportunity for bonds now?

You read my mind

Ditto. VBTLX has popped almost 5% in the last month. I had moved 75% of my bond AA to VTIP on 2/8 and the remaining 25% on 4/19. Then sold out of VTIP to cash on 9/26. I think it may be time to hop back into VBTLX. I no longer feel like like I did this past Spring, that it's a forgone conclusion that bonds will be a loser over the next 6-12 months. Since I'm not trying to market time, that uncertainty means it's time to get back in. If inflation really is moderating and a big recession doesn't happen I think there will be a good recovery in bonds.

[index]

The corporate premium over treasuries is horse crap right now. You might as well just buy treasuries and avoid total bond funds. If you want to play the rebound game, look at some individual issues. I bought some longer term debt (7-yrs out) on a couple tobacco companies for 65c on the dollar yielding 6%. They are already up 20% from last month. If you don't want the risk, you can buy 3-month treasuries yielding 4.45% for no commission on Fidelity.

[habanero]

Not everything is as it seems when it comes to bonds.

On an FX hedged basis (which is generally the case for bond funds) the actual returns can be vastly different from what bond yields imply. For a USD based investor, on a rolling FX hedged basis, the USD return from holding japanese government bonds (yield in JPY 0,25%) is higher than a 10y US treasury (yield 3,70% at mom). On an FX hedged basis the running yield in USD from owning JPY government bonds is around 5.25%.

[ChpBstrd]

Are we in a buying opportunity for bonds now?

You read my mind

Ditto. VBTLX has popped almost 5% in the last month. I had moved 75% of my bond AA to VTIP on 2/8 and the remaining 25% on 4/19. Then sold out of VTIP to cash on 9/26. I think it may be time to hop back into VBTLX. I no longer feel like like I did this past Spring, that it's a forgone conclusion that bonds will be a loser over the next 6-12 months. Since I'm not trying to market time, that uncertainty means it's time to get back in. If inflation really is moderating and a big recession doesn't happen I think there will be a good recovery in bonds.

Markets are seeing the last 4 months of inflation readings as the end of our worldwide inflation problems and a sign that the Federal Funds Rate might not go above 5%. History suggests otherwise, as I noted in the following post: https://forum.mrmoneymustache.com/investor-alley/inflation-interest-rates-share-your-data-sources-models-and-assumptions/msg3081229/#msg3081229

TL;DR -

I returned to a combined chart of CPI and PPI during the 1970s and early 80s. A four-month trend of net declining CPI and PPI, at the same time, and within a couple years of an increase in inflation, would prove that today's trend is not a reliable signal that inflation is dead.

A minimum four-month net decline in both measures began in 3Q1967, 4Q1973, 1Q1974, 3Q1974, 3Q1975, 2Q1977, 2Q1978, 2Q1980, and 2Q1981. Some of these periods of declining CPI and PPI lasted well over 4 months. The historical answer to the question is a DEFINITE NO. Four months of falling inflation do not mean the trend is over. Four-month stretches of falling inflation are actually common during inflationary or stagflationary episodes.
https://fred.stlouisfed.org/graph/?g=WvPs

The corporate premium over treasuries is horse crap right now. You might as well just buy treasuries and avoid total bond funds. If you want to play the rebound game, look at some individual issues. I bought some longer term debt (7-yrs out) on a couple tobacco companies for 65c on the dollar yielding 6%. They are already up 20% from last month. If you don't want the risk, you can buy 3-month treasuries yielding 4.45% for no commission on Fidelity.

All the signs point to a recession being imminent, so the lack of a bigger risk premium for corporate bonds is concerning. There are a lot of junk bonds trading right now that will be bankrupt within a couple of years unless interest rates fall, and many more that aren't earning their newly-increased cost of capital. If they plummet, the rest of the curve should be pulled down too.

Also, as I noted above, a 4-month trend is meaningless if we're in the midst of a multi-year inflationary episode, because that kind of false signal is historically common. It's the sort of false signal that caused the Fed to waffle on interest rate policy in the 1970s, and we might be falling for it again. There's a case to be made that NEVER has inflation been brought down when the FFR was lower than the CPI. Usually the FFR had to be raised a couple percent higher than CPI.

I'm tempted to follow you into 3-month or 6-month treasuries. I don't want to buy duration right now for the reasons outlined above. Rates could go much higher than people expect, just as they've been doing all year (remember when multiple FOMC officials talking about end-of-year rates around 3%? - that was just last summer). Plus virtually all recession predictors are flashing red alert and the economy has never survived rate hikes like these without a recession. Investors are fleeing commodities because they don't want to be trapped there when recession strikes, and that's pulling down inflation - for now. Big bear market rallies are likely, but owning stocks will probably be a losing proposition until we are clearly in recession. That is... rising unemployment, falling retail sales, falling manufacturing indices, GDP shrinkage, bankruptcies, falling commodities demand, falling earnings forecasts, etc.

Perhaps a 6-12 month treasury would mature right about the time all this is going on, dropping one off into the middle of a fire sale? And if not, what's so bad about earning >4% while avoiding virtually all risk during a high risk period like this?

[index]

The corporate premium over treasuries is horse crap right now. You might as well just buy treasuries and avoid total bond funds. If you want to play the rebound game, look at some individual issues. I bought some longer term debt (7-yrs out) on a couple tobacco companies for 65c on the dollar yielding 6%. They are already up 20% from last month. If you don't want the risk, you can buy 3-month treasuries yielding 4.45% for no commission on Fidelity.

All the signs point to a recession being imminent, so the lack of a bigger risk premium for corporate bonds is concerning. There are a lot of junk bonds trading right now that will be bankrupt within a couple of years unless interest rates fall, and many more that aren't earning their newly-increased cost of capital. If they plummet, the rest of the curve should be pulled down too.

Also, as I noted above, a 4-month trend is meaningless if we're in the midst of a multi-year inflationary episode, because that kind of false signal is historically common. It's the sort of false signal that caused the Fed to waffle on interest rate policy in the 1970s, and we might be falling for it again. There's a case to be made that NEVER has inflation been brought down when the FFR was lower than the CPI. Usually the FFR had to be raised a couple percent higher than CPI.

I'm tempted to follow you into 3-month or 6-month treasuries. I don't want to buy duration right now for the reasons outlined above. Rates could go much higher than people expect, just as they've been doing all year (remember when multiple FOMC officials talking about end-of-year rates around 3%? - that was just last summer). Plus virtually all recession predictors are flashing red alert and the economy has never survived rate hikes like these without a recession. Investors are fleeing commodities because they don't want to be trapped there when recession strikes, and that's pulling down inflation - for now. Big bear market rallies are likely, but owning stocks will probably be a losing proposition until we are clearly in recession. That is... rising unemployment, falling retail sales, falling manufacturing indices, GDP shrinkage, bankruptcies, falling commodities demand, falling earnings forecasts, etc.

Perhaps a 6-12 month treasury would mature right about the time all this is going on, dropping one off into the middle of a fire sale? And if not, what's so bad about earning >4% while avoiding virtually all risk during a high risk period like this?

I think the macro is hard and I don't have a crystal ball. I believe the S&P 500 trading on a 5% implied earnings yield when ST Treasuries are yielding 4.4% is not compensating you for taking on market risk. I think buying a broad based bond index is down right stupid when corporate A and AAs are yielding less than treasuries of the same duration.

I hate to say it, but right now is where stock/bond pickers can make their money. There are many individual companies trading at attractive FCF yield, but the indexes still have a lot of overpriced components (AAPL). If you are a index fund buyer, I would hang out in 3-6 month treasuries and sell puts on the index matched in duration with the term of my treasuries.  By this I mean buy $35k of 3-month treasury paid in February and sell a $350 SPY put expiring in February for $4. You make $775 (2.2% for an implied annual rate of 8.9%) or you end up owning the index at the current 52-week low.   
 

[habanero]

I think buying a broad based bond index is down right stupid when corporate A and AAs are yielding less than treasuries of the same duration. 

But that's not the case now, if that's what you are implying. Investment-grade US corporate bonds yield significantly more than US treasuries of the same duration. On top of my head I doubt that has ever been the case that this spread has been inverted, i.e the corporate spread over treasuries is always strictly positive. There is no reason why anyone would buy US corporate bonds that imply a yield below US treasuries of the same maturity.

VFICX (Vanguard intermediate-term investment grade bond fund) has an average maturity of 7.6 years and has a yield to maturity of 5.8%. 7y US treasuries yield around 3.8%.

[ChpBstrd]

I hate to say it, but right now is where stock/bond pickers can make their money. There are many individual companies trading at attractive FCF yield, but the indexes still have a lot of overpriced components (AAPL). If you are a index fund buyer, I would hang out in 3-6 month treasuries and sell puts on the index matched in duration with the term of my treasuries.  By this I mean buy $35k of 3-month treasury paid in February and sell a $350 SPY put expiring in February for $4. You make $775 (2.2% for an implied annual rate of 8.9%) or you end up owning the index at the current 52-week low.   

I tend to think the macro environment eats the lunch of every other consideration. Today's 52-week lows were not low enough to attract a bid from me because per nearly all the indicators, we have a recession ahead. A recession ahead *should* mean lower valuations ahead, and buying SPY at $350 would be to say an earnings yield of 5.5% seems fair, when 10y treasuries could easily exceed 5% within the next few months. Also, the forward PE and any FCF forecast is going in the toilet when the recession strikes, so why not wait for the headlines to announce your buying opportunity with "US in Recession!" or "Broker Dies In Fall From Skyscraper"? Take it from somebody who tried to sell puts this year and got burnt - this is no environment to be selling puts! :)

[index]

I think buying a broad based bond index is down right stupid when corporate A and AAs are yielding less than treasuries of the same duration. 

But that's not the case now, if that's what you are implying. Investment-grade US corporate bonds yield significantly more than US treasuries of the same duration. On top of my head I doubt that has ever been the case that this spread has been inverted, i.e the corporate spread over treasuries is always strictly positive. There is no reason why anyone would buy US corporate bonds that imply a yield below US treasuries of the same maturity.

VFICX (Vanguard intermediate-term investment grade bond fund) has an average maturity of 7.6 years and has a yield to maturity of 5.8%. 7y US treasuries yield around 3.8%.

I should say, short term treasuries are yielding more than their corporate counterparts - Especially A, AA, and AAA rated corporate bonds. The spread between treasuries and corporate bonds for issues <1-yr are inverted right now!

VFICX is 50% BBB and the BBB+ : BBB : BBB ratio - isn't broken down. With a yield to maturity of 5.8% considering the fair amount of A rated bonds (50% A or better), they are window dressing the yield with a bunch of near of BBB- bonds - (barely investment grade). Regardless of the make up of VFICX, you can get a 6-mo treasury yielding 1.3% less with no credit risk and no duration risk.

If you want to hold VFICX for 8 years, don't forget about the 0.1%/year of those bonds that will end up as losses and the 0.2% expense ratio. Your YTM is going to likely end up a little under 5.5%. 



 

[Mr. Green]

@ChpBstrd I do recognize that it's more likely than not that we're headed into a recession and bonds could fall some more. But my level of financial interest in the markets stops at headlines, sentiment, and common sense.  For better or worse, FIRE to me is the ability to not care about the details beyond the long-term modeling I do which is more like a tax efficiency game where all current variables are known. Though, I've been following the inflation thread closely.

@index options are certainly within my ability to comprehend and exercise but...I just don't want to. I want my two fund AA and think about other things. I got out of long duration bonds earlier this year because it was a certainty to me that they were in for a bruising. I'm no longer certain, so that means it's time to get back in otherwise I'm just market timing. I saved myself a 10% loss in bonds, or 2% of my portfolio, and that's a win for me.

[index]

I hate to say it, but right now is where stock/bond pickers can make their money. There are many individual companies trading at attractive FCF yield, but the indexes still have a lot of overpriced components (AAPL). If you are a index fund buyer, I would hang out in 3-6 month treasuries and sell puts on the index matched in duration with the term of my treasuries.  By this I mean buy $35k of 3-month treasury paid in February and sell a $350 SPY put expiring in February for $4. You make $775 (2.2% for an implied annual rate of 8.9%) or you end up owning the index at the current 52-week low.   

I tend to think the macro environment eats the lunch of every other consideration. Today's 52-week lows were not low enough to attract a bid from me because per nearly all the indicators, we have a recession ahead. A recession ahead *should* mean lower valuations ahead, and buying SPY at $350 would be to say an earnings yield of 5.5% seems fair, when 10y treasuries could easily exceed 5% within the next few months. Also, the forward PE and any FCF forecast is going in the toilet when the recession strikes, so why not wait for the headlines to announce your buying opportunity with "US in Recession!" or "Broker Dies In Fall From Skyscraper"? Take it from somebody who tried to sell puts this year and got burnt - this is no environment to be selling puts! :)

Yeah, we will see how much higher the 10-yr can go. The yield curve could just continue to invert and the 10-yr could top out at 5% or less. If Buffett and Munger talk about not being able to time the market then I'm not sure we can either. I just look for where you are being compensated to take risk. The increase in ST treasuries has made them attractive to ST corporates and the interest rates and volatility have really increased option premiums. I've been sitting in treasuries and selling puts on companies I like and want to own since 4300 in March. Taxable money is sitting in the same risk parity portfolio I've shared elsewhere and is down 0.75% for the year.

[EchoStache]

I was thinking about buying some 3 or 6 month treasuries for the 4.5%, but SPRXX is at 3.76.  If I understand correctly, its likely to go well over 4% with the next FFR increase before the end of the year.  Seems like there's a good chance SPRXX will be at or above 4.5 pretty soon without tying up my cash for any length of time.

[habanero]

I was thinking about buying some 3 or 6 month treasuries for the 4.5%, but SPRXX is at 3.76.  If I understand correctly, its likely to go well over 4% with the next FFR increase before the end of the year.  Seems like there's a good chance SPRXX will be at or above 4.5 pretty soon without tying up my cash for any length of time.

Should go up, yes.

SPRXX has a weighted average maturity of only 12 days so the yield isn't gonna be much more than the short-term TSY rate. 30% of the holdings are repos on USTs, 30% financial CPs, 18% CDs and 11% time deposits. The credit risk is pretty close to zero, albeit not as zero as for US T-bills.

88% of the holdings mature within 7 days and thus does not capture any of the anticipated rate hikes. When the fund rolls over these investments, they weventually will.

If you buy a 3 or 6 month t-bill, you get paid for a total of about 0.92% rate increase for the 3m and about 1.1% for the 6 month or so.

So the higher yield on t-bills doesn't really reflect any higher yield for USTs, predominatnly its a function of different maturity profile and expected rate hikes during the period.

[habanero]

I should say, short term treasuries are yielding more than their corporate counterparts - Especially A, AA, and AAA rated corporate bonds. The spread between treasuries and corporate bonds for issues <1-yr are inverted right now!

Asked an adult about this and he said obv that its stupid as f..k, but the reasons are partly technical, partly uneducated retail investors who just buy names they like without really looking at the yield (or alternatives) and thus driving down the yield + some professional holders not allowed to sell for various reasons.

[BicycleB]

@ChpBstrd I do recognize that it's more likely than not that we're headed into a recession and bonds could fall some more. But my level of financial interest in the markets stops at headlines, sentiment, and common sense.  For better or worse, FIRE to me is the ability to not care about the details beyond the long-term modeling I do which is more like a tax efficiency game where all current variables are known. Though, I've been following the inflation thread closely.

@index options are certainly within my ability to comprehend and exercise but...I just don't want to. I want my two fund AA and think about other things. I got out of long duration bonds earlier this year because it was a certainty to me that they were in for a bruising. I'm no longer certain, so that means it's time to get back in otherwise I'm just market timing. I saved myself a 10% loss in bonds, or 2% of my portfolio, and that's a win for me.

@Mr. Green (you told me how to @ you, I still don't get it) - congrats on your bond timing, very logical and seems to meet your purposes very well. I very much like the clarity you have about your personal goals, and how your decisions implement that. Well done!

[Mr. Green]

@BicycleB it worked! Or did you have to do something else?

[BicycleB]

@BicycleB it worked! Or did you have to do something else?

Oh, I see. It did work!

I guess I keep getting confused because the name selector function doesn't display your name for me. But it does produce the right result when I type it. Loop closed. :)

[vand]

I agree that yields on Treasuries are lousy, but despite that I've been trying to bring my bond holdings up to the minimum amount of my portfolio in line with my desired asset allocation.

Ironically I think there's been enough short term selling that we've dipped below the 200dma and bonds may be due a bounce in the short term, especially when the next stock market selloff comes, so I'm not that pessimistic over the next 1-2 years.

For those who also find bonds unappealling... which I imagine is most people here.. what level of yields would make them more attractive and worth buying? 3% on the 30yr note? 4%? 5%?

I find that stock investors will always find a reason not to own fixed income because yields will always seem less appealing than the expect rate of return in equities.. but such perma-thinking would have meant missing out of much of one of the greatest bull markets we've ever seen over the last 30-40 years with much less volatility than other asset classes.

And remember that it's also entirely possible that stocks (especially US) could have a negative real 10 year return from this point if you believe that valuations are a large determinant of future return (indeed that is all that anyone looking at bond yields is doing). That would be a lot of risk for no reward.


As @ChpBstrd points out big losses can happen in bonds.. but they can happen in any asset.

People think that bonds and stocks are negatively correlated which is why they hold a mix of both, but this is incorrect. They are POSITIVELY correlated over the long term, and the correlation increases the longer the holding period. That is why stock/bond portfolios have worked so well for so long in the disinflationary environment we've had since the 1980s, falling yields have driven bond prices higher, while the falling interest rates have provided a strong tailwind to equities (and real estate too).

What does this mean? If bonds fall, then equities are certain to get walloped too. Yes, bonds will fall less, but they'll still move in the same direction. 

And it doesn't need to be nominal falls.. it may be due to inflation over a prolonged period. The maximum real drawdown in bonds is something like 62% on a real basis, but most of this was through inflation rather than nominal falls.




https://www.bloomberg.com/opinion/articles/2018-02-12/bond-bear-markets-aren-t-measured-in-losses-alone

It would be interesting to see these charts updated.

Long duration bond funds are sliding to new lows and long term interest rates are rising.. EDV fund is now down -61% from peak



The question as always, is "why" long term rates are rising? Several factors spring to mind:

- economy has proven more resilient than many expected, therefore the probability of a deflationary recession has lessened

- Fed's "tighter for longer" jawboning

- oil prices have surged again. This may be for another thread, but I suspect one of the stories of tomorrow will be a new oil squeeze as Biden has continued to deplete the SOR throughout the last year and may now be forced to replenish it at a higher average price than he was selling (and if I were running against him for office it's something I would certainly try to make political capital out of)

Anyway, it can't be denied that bonds have been an utter trainwreck in the last couple of years.  So much for "relative safety".

[vand]

Came across some really interesting data analysis of Bonds and their ability to predict inflation.

Standard orthodoxy is that, as the income from bonds is fixed, bondholders have to be vigilent against inflation and the bond market has at least some insight into the path of future inflation.

However, the history of the bond market basically dispels that myth.

https://www.piie.com/blogs/realtime-economic-issues-watch/bond-yields-are-not-good-predictors-inflation

Basically, bond yields correlate most highly with the past, not with the future. Bond holders have no idea what future inflation is likely to be, and their guess for the future is based on the rear view mirror of how the past was.  Thus, at inflexion points in history when inflation changes to disinflation or vice versa, bonds have been grossly mispriced.

Makes you think that Bonds, as of 2020-21 may once again be seriously mispriced in relation to the inflation that is about to happen.

Would also like to bump this and say it was probably one of the most insightful and best posts I have ever put on MMM.   It certainly made me re-evalute my bonds and adjust my strategy to sidestep long duration bonds at a time when the risk/reward balance was grossly on the downside.

[ATtiny85]

Came across some really interesting data analysis of Bonds and their ability to predict inflation.

Standard orthodoxy is that, as the income from bonds is fixed, bondholders have to be vigilent against inflation and the bond market has at least some insight into the path of future inflation.

However, the history of the bond market basically dispels that myth.

https://www.piie.com/blogs/realtime-economic-issues-watch/bond-yields-are-not-good-predictors-inflation

Basically, bond yields correlate most highly with the past, not with the future. Bond holders have no idea what future inflation is likely to be, and their guess for the future is based on the rear view mirror of how the past was.  Thus, at inflexion points in history when inflation changes to disinflation or vice versa, bonds have been grossly mispriced.

Makes you think that Bonds, as of 2020-21 may once again be seriously mispriced in relation to the inflation that is about to happen.

Would also like to bump this and say it was probably one of the most insightful and best posts I have ever put on MMM.   It certainly made me re-evalute my bonds and adjust my strategy to sidestep long duration bonds at a time when the risk/reward balance was grossly on the downside.

I think you mean hindsightful posts. It looks great now, but no way to tell two years ago it was going to be great. So much is obvious and clear now, as always.

But hey, congrats on the side step. Now what?

[vand]

Came across some really interesting data analysis of Bonds and their ability to predict inflation.

Standard orthodoxy is that, as the income from bonds is fixed, bondholders have to be vigilent against inflation and the bond market has at least some insight into the path of future inflation.

However, the history of the bond market basically dispels that myth.

https://www.piie.com/blogs/realtime-economic-issues-watch/bond-yields-are-not-good-predictors-inflation

Basically, bond yields correlate most highly with the past, not with the future. Bond holders have no idea what future inflation is likely to be, and their guess for the future is based on the rear view mirror of how the past was.  Thus, at inflexion points in history when inflation changes to disinflation or vice versa, bonds have been grossly mispriced.

Makes you think that Bonds, as of 2020-21 may once again be seriously mispriced in relation to the inflation that is about to happen.

Would also like to bump this and say it was probably one of the most insightful and best posts I have ever put on MMM.   It certainly made me re-evalute my bonds and adjust my strategy to sidestep long duration bonds at a time when the risk/reward balance was grossly on the downside.

I think you mean hindsightful posts. It looks great now, but no way to tell two years ago it was going to be great. So much is obvious and clear now, as always.

But hey, congrats on the side step. Now what?

I think it's OK to bring some bonds back in at these levels, but I personally I still prefer the alternative income plays - high yield stocks, preference stock, reits. This is easier to execute for me in the UK as dividends are not taxed to the payer and there are plenty of dividend stocks paying 7, 8 even 9%+.

I do see inflation continuing to moderate in the medium term, though it will be in small peaks and troughs. 

Worth holding some long duration bonds too imo - if it does prove that the Fed has overdone it and we do get the recession that everyone expected this year arriving in 2024 instead then rates are going to get slashed in a hurry, and these funds could do very.  That would be my crash protection play.

[ChpBstrd]

In all the historical examples I’ve found, inverted yield curves were eventuall uninverted by cuts to overnight rates, which brought them down and eventually below long-term rates. What we’re seeing now is the opposite - long term rates rising while short term stays in place.

Un-inversion usually happens right before or in the first half of a recession.

Today’s rising long-term rates reflect a growing belief that the neutral rate of interest may be higher than in the past. Such a belief could be challenged if a recession suddenly hits. The potential could exist for a combo of a recession and a stubborn Fed that won’t cut rates very much, for fear of repeating the 1970s. Either a higher neutral or a stubborn Fed could result in higher for longer, but history suggests central banks are quick to cut rates when trouble arises. I’m betting on trouble.

[tooqk4u22]

In all the historical examples I’ve found, inverted yield curves were eventuall uninverted by cuts to overnight rates, which brought them down and eventually below long-term rates. What we’re seeing now is the opposite - long term rates rising while short term stays in place.

Un-inversion usually happens right before or in the first half of a recession.

Today’s rising long-term rates reflect a growing belief that the neutral rate of interest may be higher than in the past. Such a belief could be challenged if a recession suddenly hits. The potential could exist for a combo of a recession and a stubborn Fed that won’t cut rates very much, for fear of repeating the 1970s. Either a higher neutral or a stubborn Fed could result in higher for longer, but history suggests central banks are quick to cut rates when trouble arises. I’m betting on trouble.

Yeah but the pandemic 0% rates and more specifically QE bond buying, both went on for too long, too much and were to slow to change the other way changed all that.    So we are unwinding it, fed took care of the short end and markets are taking care of the long end.    Regression to the mean is at play. 

Next step will be topping out of long term treasuries (who knows where that will be), breaking of the economy to a recession (???? When), he short term rate cuts and then the natural balance of short vs long will be restored.  The 10year historically averages 2% above inflation so that is where it should settle in but right now we have three problems - still high (but not as high) inflation, too much supply (spending), not enough demand (not enough buyers - the Fed, China, japan).  10 yr should probably be 4.5-5% now but bc of those factors I could easily see it keep going up.   

I still think 10 year ust will eventually end up in the 3-4% range 1-3 years but it will take recession, reduced Fed spending and increased taxes.

[ChpBstrd]

In all the historical examples I’ve found, inverted yield curves were eventuall uninverted by cuts to overnight rates, which brought them down and eventually below long-term rates. What we’re seeing now is the opposite - long term rates rising while short term stays in place.

Un-inversion usually happens right before or in the first half of a recession.

Today’s rising long-term rates reflect a growing belief that the neutral rate of interest may be higher than in the past. Such a belief could be challenged if a recession suddenly hits. The potential could exist for a combo of a recession and a stubborn Fed that won’t cut rates very much, for fear of repeating the 1970s. Either a higher neutral or a stubborn Fed could result in higher for longer, but history suggests central banks are quick to cut rates when trouble arises. I’m betting on trouble.

Yeah but the pandemic 0% rates and more specifically QE bond buying, both went on for too long, too much and were to slow to change the other way changed all that.    So we are unwinding it, fed took care of the short end and markets are taking care of the long end.    Regression to the mean is at play. 

Next step will be topping out of long term treasuries (who knows where that will be), breaking of the economy to a recession (???? When), he short term rate cuts and then the natural balance of short vs long will be restored.  The 10year historically averages 2% above inflation so that is where it should settle in but right now we have three problems - still high (but not as high) inflation, too much supply (spending), not enough demand (not enough buyers - the Fed, China, japan).  10 yr should probably be 4.5-5% now but bc of those factors I could easily see it keep going up.   

I still think 10 year ust will eventually end up in the 3-4% range 1-3 years but it will take recession, reduced Fed spending and increased taxes.

There's also a big lump of treasuries issued over the past 2 months in relation to the debt ceiling fight last May/June. Long-duration bond prices are being pushed down by a glut in supply. Basically we dammed up the supply of treasuries and then let the flood loose, resulting in high bond prices earlier this year and a sudden drop in prices now.

A second debt ceiling holdup could occur again as soon as this November, leading to a short-lived bond rally as supply once again becomes scarce. Then another flood of supply will be let loose whenever a new debt ceiling is passed. There is the possibility of options trades on TLT and ZROZ around these foreseeable events.

The heart of the issue is that the Senators and Representatives who control the debt ceiling have no incentive to reduce economic damage. They're from safe districts and know the president usually takes the public blame. So they'll fight for concessions, possibly for weeks.

[erjkism]

Considering this information, should one liquidate everything and sit in short term treasuries and wait for a buying opportunity in the future?

[tooqk4u22]

Considering this information, should one liquidate everything and sit in short term treasuries and wait for a buying opportunity in the future?

Let me check my crystal ball........sorry, seems it's not working.   

Anything I tell you is certainly wrong.   I do what helps me sleep at night and my AA overall and within categories shift somewhat with my view on markets.   Sometimes it works and sometimes it doesn't.

-  start of pandemic all of my fixed income went to cash/money market/short bond funds....made nothing but didn't lose as much when rates started to turn.
- during 2021 during meme and tech craziness, moved half of sp500 into growth.  That worked.
- didn't move it back this year, that didn't work. Would have been far better this beat all in sp500.
- started dipping into intermediate bond funds (BND) two weeks ago, so far a bit early and isn't working. Still relatively small piece so current money market rates offset.

Anyway, right now I am comfortable being slightly underweight equities with that buck split between sp500, value and international and fixed income still mostly short but DCAing (not quickly) into intermediate duration to locking higher yields for when the Fed gets its way - DON'T FIGHT THE FED is a saying for a reason.   

Will it work, probably not the way I want it to.

[ChpBstrd]

Speaking of don’t fight the Fed:
https://finance.yahoo.com/news/long-bonds-historic-46-meltdown-203420067.html

Bonds maturing in 10 years or more have slumped 46% since peaking in March 2020, according to data compiled by Bloomberg. That’s just shy of the 49% plunge in US stocks in the aftermath of the dot-com bust at the turn of the century. The rout in 30-year bonds has been even worse, tumbling 53%, nearing the 57% slump in equities during the depths of the financial crisis.

Perhaps the single best example of the staggering pain inflicted on investors is the rout in the 1.25%, 30-year Treasury sold in May 2020. The bond has lost more than half its value since it was issued, trading at around 45 cents on the dollar.

I was warning years ago that people were about to get a lesson in convexity if rates ever blipped back up. But now it may be time to look for the upside in those 1.25% yielding 2020 bonds, because something is seriously about to break. 7.5% mortgages? Record low home affordability? Banks with massive losses in their HTM portfolios? Empty and obsolete offices? We’re a few tenths of a percent on the unemployment rate from another debt crisis.

[tooqk4u22]

Speaking of don’t fight the Fed:
https://finance.yahoo.com/news/long-bonds-historic-46-meltdown-203420067.html

Bonds maturing in 10 years or more have slumped 46% since peaking in March 2020, according to data compiled by Bloomberg. That’s just shy of the 49% plunge in US stocks in the aftermath of the dot-com bust at the turn of the century. The rout in 30-year bonds has been even worse, tumbling 53%, nearing the 57% slump in equities during the depths of the financial crisis.

Perhaps the single best example of the staggering pain inflicted on investors is the rout in the 1.25%, 30-year Treasury sold in May 2020. The bond has lost more than half its value since it was issued, trading at around 45 cents on the dollar.

I was warning years ago that people were about to get a lesson in convexity if rates ever blipped back up. But now it may be time to look for the upside in those 1.25% yielding 2020 bonds, because something is seriously about to break. 7.5% mortgages? Record low home affordability? Banks with massive losses in their HTM portfolios? Empty and obsolete offices? We’re a few tenths of a percent on the unemployment rate from another debt crisis.

The TLT is back to 2007 levels.   

Pretty much why I am still mostly very short on fixed income and underweight equities.   

The system got broken during ZIRP and QE, and now it is repairing itself.    The problem is most think it's the opposite of that where now it is breaking.   

Offices are just the first and obvious real estate that is suffering, you will see other asset classes get impacted as their debt comes due.   The darlings of apartments and warehouses are down 15-25% but there is not much discussion about it bc there is no action until maturities occur.   There shouldn't be loan losses bc there will still be equity to sell/recap unlike office but current owners will take a hit.   

The market is overvalued relative to interest rates but take out mega tech and it's not too bad.

[Mr Mark]

I'm going long a few Jan 2025 TLT calls in my play account, must confess...

[ChpBstrd]

I'm going long a few Jan 2025 TLT calls in my play account, must confess...

Not a bad hedging idea against a long stocks portfolio, honestly.

Thinking through the scenarios, there are lots of ways the economy crashes and rates are slashed sooner than expected, and only one or two paths where long-term rates keep climbing. For TLT or ZROZ to lose significantly more value from this point, I think one of the following scenarios would have to occur:

1) Inflation comes back despite >5% interest rates and QT. Another commodities shock, a drought, issues with China affecting the flow of cheap goods into the U.S, or an unexpected wage spiral could cause this. The Fed keeps raising the FFR beyond 6%.

2) The yield curve un-inverts in an unusual way - with long-term rates rising above the >5% Fed Funds Rate as market participants increasingly accept the "higher for longer" narrative about the new normal rate regime. Either a recession doesn't occur or it is ignored by a stoical Fed which doesn't significantly cut rates. Yield curves usually un-invert right before or during the recession, but it is usually because of rate cuts at the short-duration end.

I think either of these are less likely than a recession followed by 125-300bp of rate cuts. But if I'm mostly invested in short-duration fixed income, then maybe I need to look at hedging the above possibilities with TLT/ZROZ puts!

[ChpBstrd]

On the subject of bonds, here are two interesting econ ideas about how the changing negative/positive correlation between stocks and bonds could affect the risk premium for bonds.

https://www.marketwatch.com/story/this-researcher-came-up-with-a-key-insight-for-why-bonds-sell-off-six-years-ago-people-thought-it-was-a-strange-topic-d25cff9c?mod=home-page

In a nutshell, and according to my understanding:

1) Stocks and bonds are sometimes negatively correlated and sometimes positively correlated. I.e. sometimes a bond portfolio moves opposite a stock portfolio, hedging the risks from stocks, and other times bonds move alongside stocks, adding to the overall risk exposure.

2) "When the bond and stock markets move in different directions, bonds are a good hedge for stocks, making it easier for markets to soak up new Treasury supply, wrote Hou in the research paper. But when the correlation is positive — when stocks and bonds move in the same direction — bond risk premiums rise in response to an increase in the Treasury supply.

“Investors will need to be compensated for taking on additional risk that accompanies the increase in supply. Demand will be less elastic and risk premiums will need to rise more per unit of supply,” he wrote."

That is to say, when investors face an environment where stocks and bonds are moving together, they have to worry about their stocks and bonds falling together, like in 2022. Bonds become less useful if they cannot hedge a portfolio, and so demand for them drops. In a correlated environment, cash becomes the only hedge.

3) Investors require more compensation for an asset correlated to stocks and so that reduces demand and bond prices further than would otherwise be logical. I.e. when it's 2022 and you're losing big money on both stocks and bonds amid a rate-hiking campaign, you don't have as much to reallocate to new bonds. At other times, when stocks and bonds are counter-correlated, you are making money on rising stocks and so you have the funds to buy falling bonds, or vice versa. When both assets are correlated, the only way to hedge is cash, and so instead of a 60% stock 40% bond portfolio maybe you choose a 60% stock 40% cash portfolio. That means selling bonds. This is what Hu means when he says "demand will become less elastic and risk premiums will need to rise more per unit of supply."

-----------------

The 10 year rolling correlation between stocks and bonds switched from positive to negative around 1999, and then they probably switched from negative to positive in 2022. It is thought by some this switch occurs when markets switch from a high-growth regime where the concern is inflation to a low-growth regime where the concern is growth.

-----------------

During the 20-teens and after the pandemic, the market was concerned with growth. Investors were interested in bonds because they were skeptical growth would continue and stocks would do well. Starting in 2022 amid rapid economic growth, investors suddenly switched to being concerned about inflation. If rates were going to rise, neither stocks nor bonds would do well, so both sold off. Money market account inflows became huge in 2023. That's because cash was the only thing working as a hedge.

It's fair to say we're currently in an environment of rapid growth where investors' main concern is inflation. However, concerns about a possible recession may soon move to the forefront, bringing back concerns about growth. The FFR is 5.5%, and likely to go to 5.75% depending on September's CPI and PCE. After a decade-plus of corporate malinvestment in low-yielding assets ranging from treasuries to mortgages to physical corporate assets, everyone is about to face a 6-7% cost of refinancing debt on assets that return 3-5%. That means deleveraging and shutting down under-performing businesses - and growth anxiety for stocks.

Thus I expect a more typical negative stock-bond correlation in 2024 - the reversal of 2022. Bad news for stocks will be good news for bonds going forward, and vice versa. If rate cuts come and boost bond prices, it will be due to the sort of issues that drive stock prices down - a recession or economic crisis. On the flipside, more growth will boost stocks and cause interest rates to rise more, depressing bonds.

Bonds make more sense as hedges or as low-risk bear market bets with big upside now than they did in 2022. In the event of a reversal in interest rates, the longest-duration bonds - which lost the most over the past 1.75 years - will have the highest payoff due to the same reason that devastated them when rates rose: convexity.

For example, a 30y treasury issued in May 2020 (CUSIP: 912810SN9) with a 1.25% coupon is today selling for $452.40. If rates fell from today's 4.99% to 4% in one year, that bond would gain about 23.8% in value.
If rates fell to 3%, it would gain about 51.3%%.
If rates fell to 2%, it would gain about 86%.

On the flipside, if long-duration rates continue to rise, your possible losses are:
Six percent: about -15.2%
Seven percent: about -29%

Thus there is a lopsided payoff function, with significantly more to gain than there is to lose. This is the bond where you should go all-in if you are confidently forecasting a repeat of 2008, when the FFR was cut 500bp in about 18 mos. The downside is that the current yield of 2.765% is not very high. Those already living off their money may not have the stomach to endure this trade, which might take a couple of years to come to fruition.

[blue_green_sparks]

I have some $ in those covered call ETFs and they almost seem to function as bonds typically do. They underperform in a bull market but overperform in bear or sideways markets and provide income. The government better be careful, LOL. They are gonna need to sell a lot of bonds to pay for all this spending deficit.

[vand]

On the subject of bonds, here are two interesting econ ideas about how the changing negative/positive correlation between stocks and bonds could affect the risk premium for bonds.

https://www.marketwatch.com/story/this-researcher-came-up-with-a-key-insight-for-why-bonds-sell-off-six-years-ago-people-thought-it-was-a-strange-topic-d25cff9c?mod=home-page

In a nutshell, and according to my understanding:

1) Stocks and bonds are sometimes negatively correlated and sometimes positively correlated. I.e. sometimes a bond portfolio moves opposite a stock portfolio, hedging the risks from stocks, and other times bonds move alongside stocks, adding to the overall risk exposure.

2) "When the bond and stock markets move in different directions, bonds are a good hedge for stocks, making it easier for markets to soak up new Treasury supply, wrote Hou in the research paper. But when the correlation is positive — when stocks and bonds move in the same direction — bond risk premiums rise in response to an increase in the Treasury supply.

“Investors will need to be compensated for taking on additional risk that accompanies the increase in supply. Demand will be less elastic and risk premiums will need to rise more per unit of supply,” he wrote."

That is to say, when investors face an environment where stocks and bonds are moving together, they have to worry about their stocks and bonds falling together, like in 2022. Bonds become less useful if they cannot hedge a portfolio, and so demand for them drops. In a correlated environment, cash becomes the only hedge.

3) Investors require more compensation for an asset correlated to stocks and so that reduces demand and bond prices further than would otherwise be logical. I.e. when it's 2022 and you're losing big money on both stocks and bonds amid a rate-hiking campaign, you don't have as much to reallocate to new bonds. At other times, when stocks and bonds are counter-correlated, you are making money on rising stocks and so you have the funds to buy falling bonds, or vice versa. When both assets are correlated, the only way to hedge is cash, and so instead of a 60% stock 40% bond portfolio maybe you choose a 60% stock 40% cash portfolio. That means selling bonds. This is what Hu means when he says "demand will become less elastic and risk premiums will need to rise more per unit of supply."

-----------------

The 10 year rolling correlation between stocks and bonds switched from positive to negative around 1999, and then they probably switched from negative to positive in 2022. It is thought by some this switch occurs when markets switch from a high-growth regime where the concern is inflation to a low-growth regime where the concern is growth.

-----------------

During the 20-teens and after the pandemic, the market was concerned with growth. Investors were interested in bonds because they were skeptical growth would continue and stocks would do well. Starting in 2022 amid rapid economic growth, investors suddenly switched to being concerned about inflation. If rates were going to rise, neither stocks nor bonds would do well, so both sold off. Money market account inflows became huge in 2023. That's because cash was the only thing working as a hedge.

It's fair to say we're currently in an environment of rapid growth where investors' main concern is inflation. However, concerns about a possible recession may soon move to the forefront, bringing back concerns about growth. The FFR is 5.5%, and likely to go to 5.75% depending on September's CPI and PCE. After a decade-plus of corporate malinvestment in low-yielding assets ranging from treasuries to mortgages to physical corporate assets, everyone is about to face a 6-7% cost of refinancing debt on assets that return 3-5%. That means deleveraging and shutting down under-performing businesses - and growth anxiety for stocks.

Thus I expect a more typical negative stock-bond correlation in 2024 - the reversal of 2022. Bad news for stocks will be good news for bonds going forward, and vice versa. If rate cuts come and boost bond prices, it will be due to the sort of issues that drive stock prices down - a recession or economic crisis. On the flipside, more growth will boost stocks and cause interest rates to rise more, depressing bonds.

Bonds make more sense as hedges or as low-risk bear market bets with big upside now than they did in 2022. In the event of a reversal in interest rates, the longest-duration bonds - which lost the most over the past 1.75 years - will have the highest payoff due to the same reason that devastated them when rates rose: convexity.

For example, a 30y treasury issued in May 2020 (CUSIP: 912810SN9) with a 1.25% coupon is today selling for $452.40. If rates fell from today's 4.99% to 4% in one year, that bond would gain about 23.8% in value.
If rates fell to 3%, it would gain about 51.3%%.
If rates fell to 2%, it would gain about 86%.

On the flipside, if long-duration rates continue to rise, your possible losses are:
Six percent: about -15.2%
Seven percent: about -29%

Thus there is a lopsided payoff function, with significantly more to gain than there is to lose. This is the bond where you should go all-in if you are confidently forecasting a repeat of 2008, when the FFR was cut 500bp in about 18 mos. The downside is that the current yield of 2.765% is not very high. Those already living off their money may not have the stomach to endure this trade, which might take a couple of years to come to fruition.

The article is paywalled for me, but from the comments I think they are broadly correct. People simply forgot about, disregarded, and oversimplified the relationship that has always existed between two asset classes which do have fundamental differences, but also some fundamental similarities too.

The Einstein quote to "make it simple - but not too simple." rings true here.  It is too simple to say that bonds always move opposite to stocks (why then would you want to own them at all if they have a tendency to move lower, if stocks have a tendency to move higher?). Oftentimes they can provide diversification, but they too are affected by macro economic factors that may play against both asset classes.

[GuitarStv]

So when would bonds and stocks go back to behaving differently from one another again?

[ChpBstrd]

So when would bonds and stocks go back to behaving differently from one another again?

Right now, rising interest rates are affecting both asset classes together. It's just basic DCF math affecting all assets.

When the market's worries shift from inflation back to growth, the correlation will flip negative. So you're watching for the end of rate hikes and a rise in recession fears. E.g. if a recession starts and rates are cut, bonds will do well while stocks probably won't.

[Radagast]

So when would bonds and stocks go back to behaving differently from one another again?

I said this quite a bit in old times:
1900-1940: bond prices go up and up and up
1940-1980: bond prices go down and down and down
1980-2020: bonds prices go up and up and up
2020-2060: ?

I love finding patterns at least as much as anyone, so maybe don't read to much into that one, but that is the history. I've posted similar about international vs US stock returns on a 30-year cycle to 2020, but so far they aren't following my pattern.

[ChpBstrd]

$50k of my short duration treasuries matured today. I sold $517 worth of put options on 400 shares of TLT at the 85.5 strike, with a few days to go. I also have an order to sell a put on 100 shares of ZROZ. Thoughts:

1) Gaza conflict could expand to Hezbolla in the North, the West Bank, or to Iran in the Straits of Hormuz. Any such outcome would drive up demand for treasuries.

2) Wars in Ukraine and Gaza could give China, Iran, or Serbia the opportunity to start new wars while the U.S. and NATO are distracted. Any such disaster would also be treasury-positive.

3) House Speaker Jim Jordan will have to create a debt ceiling crisis in November or else commit political suicide. Another shutdown would reduce the supply of treasuries and lower their yields.

4) Even if none of the above happens, we’re at or near the end of this rate hiking cycle. My timing could be bad and long term rates could rise to 5% or 5.25% but the odds of going down seem higher than the odds of going up. Inflation is mostly a byproduct of the real estate bubble, as the shelter component is the only reason why core CPI was above 2.0% in September. Rate cuts are simply a wait for the bubble to burst. A couple million job losses due to interest rates would be sufficient to pop the bubble.

[EvenSteven]

$50k of my short duration treasuries matured today. I sold $517 worth of put options on 400 shares of TLT at the 85.5 strike, with a few days to go. I also have an order to sell a put on 100 shares of ZROZ. Thoughts:

1) Gaza conflict could expand to Hezbolla in the North, the West Bank, or to Iran in the Straits of Hormuz. Any such outcome would drive up demand for treasuries.

2) Wars in Ukraine and Gaza could give China, Iran, or Serbia the opportunity to start new wars while the U.S. and NATO are distracted. Any such disaster would also be treasury-positive.

3) House Speaker Jim Jordan will have to create a debt ceiling crisis in November or else commit political suicide. Another shutdown would reduce the supply of treasuries and lower their yields.

4) Even if none of the above happens, we’re at or near the end of this rate hiking cycle. My timing could be bad and long term rates could rise to 5% or 5.25% but the odds of going down seem higher than the odds of going up. Inflation is mostly a byproduct of the real estate bubble, as the shelter component is the only reason why core CPI was above 2.0% in September. Rate cuts are simply a wait for the bubble to burst. A couple million job losses due to interest rates would be sufficient to pop the bubble.

Is this news just breaking, or do you mean who ever the speaker ends up being?

[grantmeaname]

That's a supposition. Gym doesn't have the job yet.

[MustacheAndaHalf]

1) Gaza conflict could expand to Hezbolla in the North, the West Bank, or to Iran in the Straits of Hormuz. Any such outcome would drive up demand for treasuries.

My interpretation is that Hezbollah wants to distract Israel without provoking an invasion of Lebanon - you can see that in their limited attacks on Israel.  I don't follow why the West Bank would pose a threat for Israel - Hamas rules Gaza, not the West Bank.

Of that list, Iran seems most able to cause trouble and move oil prices.

2) Wars in Ukraine and Gaza could give China, Iran, or Serbia the opportunity to start new wars while the U.S. and NATO are distracted. Any such disaster would also be treasury-positive.

China attacking Taiwan impacts the worldwide market for computer chips, while Iran starting a war impacts the oil market.  I'm not following why a Serbia-Kosovo conflict has a worldwide impact.

3) House Speaker Jim Jordan will have to create a debt ceiling crisis in November or else commit political suicide. Another shutdown would reduce the supply of treasuries and lower their yields.

You're assuming Jim Jordan wins the vote to become speaker on Tuesday, when 55 Republicans are against him.  That's more than opposed Kevin McCarthy, back when he needed 15 rounds of voting and concessions to become House Speaker.

[ChpBstrd]

RE: Jim Jordan… just hide and watch. Horses are being traded, favors are being called in, and pork barrel spending is being planned in exchange for every single vote. According to CBSnews.com:

When the Republican conference went into recess Friday afternoon, Jordan had won the votes of 152 Republicans members by secret ballot, and 55 said they would not vote for him on the House floor. At the end of the weekend, there were still 10 to 20 holdouts, CBS News' Robert Costa reported.

If that’s the amount of bargaining done in just one weekend. He’s probably in. This is not some sort of core values opposition - it’s flat-out bargaining for advantages, and it takes time.

RE: Hezbollah… Like Hamas they are an Iranian proxy devoted to the destruction of Israel and conquest of allegedly holy sites. Their role may be to distract, but it could easily change into a role of opening up a two front war. It may be politically unpalatable for Hezbollah to just sit there doing nothing while the Palestinians are massacred in Gaza.

RE: West Bank… Fatah officially rules the West Bank but Hamas has a strong presence and a desire to take over. A call for demonstrations could bring thousands into the streets, as has happened before. Or… Hamas supporters could launch attacks and provoke another Israeli incursion, as has happened before.

RE: Serbia… Russia-allied Serbia recently launched a deadly military incursion into Kosovo and is building up forces along the border. The whole Balkan region remains a powder keg of ethnic hatred and has generally featured a genocidal war every couple of decades for all of its modern history. Russia, meanwhile, could give an order that would drag NATO into a Balkan proxy war. European countries are sending more troops to the UN peacekeeping mission there.

[Must_ache]

Ditto. VBTLX has popped almost 5% in the last month. I had moved 75% of my bond AA to VTIP on 2/8 and the remaining 25% on 4/19. Then sold out of VTIP to cash on 9/26. I think it may be time to hop back into VBTLX. I no longer feel like like I did this past Spring, that it's a forgone conclusion that bonds will be a loser over the next 6-12 months. Since I'm not trying to market time, that uncertainty means it's time to get back in. If inflation really is moderating and a big recession doesn't happen I think there will be a good recovery in bonds.

So what exactly is market timing? Because it certainly sounds to me like you're doing exactly that.  That being said, we all have to decide what investments we are comfortable with.

[tooqk4u22]

$50k of my short duration treasuries matured today. I sold $517 worth of put options on 400 shares of TLT at the 85.5 strike, with a few days to go. I also have an order to sell a put on 100 shares of ZROZ. Thoughts:

1) Gaza conflict could expand to Hezbolla in the North, the West Bank, or to Iran in the Straits of Hormuz. Any such outcome would drive up demand for treasuries.

It will expand to Hezbolla, already is, but will get worse. Won't have a discernable impact on US treasuries.
 

2) Wars in Ukraine and Gaza could give China, Iran, or Serbia the opportunity to start new wars while the U.S. and NATO are distracted. Any such disaster would also be treasury-positive.

China has already been antagonistic and Serbia/Kosovo doesn't matter.   Iran is the issue. Israel leveling Gaza is a trap and will draw/force/excuse Iran involvement (eradicating Hamas is far different than leveling a whole city because they are there even if most are sympathizers of Hamas.) But when Iran gets fully engaged then it will become a problem with countries taking sides, NATO (US) will have to step in and yes treasuries will fall bc there will be fear of WW3 when combined with Ukraine and China tensions

3) House Speaker Jim Jordan will have to create a debt ceiling crisis in November or else commit political suicide. Another shutdown would reduce the supply of treasuries and lower their yields.

democrats are f'ing idiots, McCarthy may be a toxic troll but he reached ever so limitedly over the aisle and got whacked, aided by the dems so they can aid i. The comete shit show disfunction of the republican party and blinded by the fact that whoever ends up being the speaker is likelybto be wosre and more toxic than McCarthy.....and increase the likelihood of a shutdown

4) Even if none of the above happens, we’re at or near the end of this rate hiking cycle. My timing could be bad and long term rates could rise to 5% or 5.25% but the odds of going down seem higher than the odds of going up. Inflation is mostly a byproduct of the real estate bubble, as the shelter component is the only reason why core CPI was above 2.0% in September. Rate cuts are simply a wait for the bubble to burst. A couple million job losses due to interest rates would be sufficient to pop the bubble.

the 10yr should be 5-5.5% given where inflation is so either global distress is holding it down or market is where you are in that recession is coming, but then equities have it all wrong......i have no clue which side is right but i tend to side with the belief of "Don't fight the FED!"...we are just conditioned to believe it when they are cutting rates....thebpace of rate hikes and QT may or may not break something but FED will win

Anyway, there is a fear bid at the moment but it won't be sustainable enough to offset the ridiculous supply (drunken sailor spending at ever higher rates) and lower demand (China and Japan less buying and the big dummy buyer of last resort (FED) is selling.....the math just doesn't add up for rates to go down for a year or two.  And really, the rate historically isn't that bad.   

[maizefolk]

2) Wars in Ukraine and Gaza could give China, Iran, or Serbia the opportunity to start new wars while the U.S. and NATO are distracted. Any such disaster would also be treasury-positive.

China has already been antagonistic and Serbia/Kosovo doesn't matter.   Iran is the issue. Israel leveling Gaza is a trap and will draw/force/excuse Iran involvement (eradicating Hamas is far different than leveling a whole city because they are there even if most are sympathizers of Hamas.) But when Iran gets fully engaged then it will become a problem with countries taking sides, NATO (US) will have to step in and yes treasuries will fall bc there will be fear of WW3 when combined with Ukraine and China tensions

Anyway, there is a fear bid at the moment but it won't be sustainable enough to offset the ridiculous supply (drunken sailor spending at ever higher rates) and lower demand (China and Japan less buying and the big dummy buyer of last resort (FED) is selling.....the math just doesn't add up for rates to go down for a year or two.  And really, the rate historically isn't that bad.   
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China deciding that when the USA is already engaged in supporting two different countries in two different wars is a once in multiple decades opportunity to start a war and pick up Taiwan when the USA is much less likely to intervene is an awful lot worse than China just being antagonistic and feels worryingly plausible at the moment.