Bonds !!!

[habanero]

If you want to go ahead and lock in duration at today's high-ish yields, what are good choices about what to buy instead of AGG?

The obvious alternative will be some broad US treasury fund, or a combination of the two. Investment-grade corporate bond spreads over US treasuries are, historically speaking, quite low at the moment so you're not overly well compensated for the extra risk. As long as everything is happily humming along you're fine, but if/when shit hits the fan one way or another, one generally discovers the difference between treasuries and corporate bonds. At the end of the day the losses might be small, but price movements can be quite violent when spreads blow out.

Spread of us BBB bonds (lowest investment-grade rating) attached.

[BicycleB]

If you want to go ahead and lock in duration at today's high-ish yields, what are good choices about what to buy instead of AGG?

The obvious alternative will be some broad US treasury fund, or a combination of the two. Investment-grade corporate bond spreads over US treasuries are, historically speaking, quite low at the moment so you're not overly well compensated for the extra risk. As long as everything is happily humming along you're fine, but if/when shit hits the fan one way or another, one generally discovers the difference between treasuries and corporate bonds. At the end of the day the losses might be small, but price movements can be quite violent when spreads blow out.

Spread of us BBB bonds (lowest investment-grade rating) attached.

Thanks, @habanero

[Radagast]

I'd been using limit orders to buy ZROZ every two weeks for years to scrape up the last few pennies in the account. It looked pretty genius until two weeks ago! My largest ZROZ holding is now in the positive, overall holding probably still needs another 10-15% gain to break even.

[Radagast]

If you want to go ahead and lock in duration at today's high-ish yields, what are good choices about what to buy instead of AGG?

Sounding like a broken record, but I use PIMCO 25+ Year Zero Coupon U.S. Treasury Index (ZROZ) - duration ~27 years - in tax advantaged accounts.

I use VWALX-Vanguard High-Yield Tax-Exempt (VWALX) - duration ~7.9 years - in taxable accounts. Taxable bonds are always callable as far as I know, so it's hard to get much longer duration than 8 years. Also note VWALX is not a passive index fund, and they've apparently been increasing duration in the face of rising rates, as it used to be more like 6.7 years.

It never makes sense to buy more duration than you need, but in an inverted it especially doesn't make sense as you don't know which way it will un-invert.

[vand]

With the unusual situation of near term interest rate still being above long term rates, there is not the usual guarantee that long term rates will move down much (or at all) during the next rate cutting cycle... you may not get compensated for holding the longest duration bonds.  As such there is an arugment to keep your duration shorter - perhaps 7-10yr durations.

[habanero]

With the unusual situation of near term interest rate still being above long term rates, there is not the usual guarantee that long term rates will move down much (or at all) during the next rate cutting cycle... you may not get compensated for holding the longest duration bonds.  As such there is an arugment to keep your duration shorter - perhaps 7-10yr durations.

7-10 years is still massive duration. If you buy some variety of a global corp bond fund the duration will be like 5-6-7 years. 7-10 years might not sound long in a world where you can buy 30y bonds (or 50y or 100y if you go to Europe) but a big pile of shit (good or bad) can happen in 7-10 years. You can easily make a case for almost anything - short rates getting cut fast due to whatever or long-term rates exploding at some stage due to the massive US debt with no reduction in sight etc.

If the US gets inflation under control locking in 10y real returns of 1.5-2% for 10y with no credit risk aint bad. But long term rates can do whatever. I think in genreal bonds should not be viewed as a way to make great returns but rather something which gives a rather certain income and above all as an insurance against doing something stupid when equity markets tank, The latter is pretty much an arument for buying government bonds over corp bonds - giving up some yield in return for owning something that tends to perform when shit hits the fan. How much duration to have is more complicated and there is not really a clear answer. And there are times when you really dont want to buy bonds - like when yields are zero or negative. Thats a lot of downside for not much, if any, upside.

High-yield bonds is also from time to time an attractive asset class. They offer equity-like returns (8-10%) but with significantly less risk and generally dont have much duration. For retail investors in bond format to get diversification which is very hard to get on your own unless you have a fuckton of money as minium denomation on most bonds is quite high. HY bonds is a good thing to buy when times look most dire (like equities).

As an addendum the term "risk-free bonds" is heavily misunderstood. It really only means guaranteed repayment of principal. You still have interest rate risk and inflation risk so there aint no guarantee for your real return or any stability in market value of your holdings. If you bought ZROZ at its peak in 2020 you would now have lost 60% which is probs not quite what you expected from buying US govvies.

Bonds as an asset class are, in general, badly understood. And vastly more complex than equities despite the latter getting all the attention and being much sexier.

(edit: a few typos, probably some left, im not a native speaker and slightly intoxicated)

[vand]

With the unusual situation of near term interest rate still being above long term rates, there is not the usual guarantee that long term rates will move down much (or at all) during the next rate cutting cycle... you may not get compensated for holding the longest duration bonds.  As such there is an arugment to keep your duration shorter - perhaps 7-10yr durations.

7-10 years is still massive duration. If you buy some variety of a global corp bond fund the duration will be like 5-6-7 years. 7-10 years might not sound long in a world where you can buy 30y bonds (or 50y or 100y if you go to Europe) but a big pile of shit (good or bad) can happen in 7-10 years. You can easily make a case for almost anything - short rates getting cut fast due to whatever or long-term rates exploding at some stage due to the massive US debt with no reduction in sight etc.

If the US gets inflation under control locking in 10y real returns of 1.5-2% for 10y with no credit risk aint bad. But long term rates can do whatever. I think in genreal bonds should not be viewed as a way to make great returns but rather something which gives a rather certain income and above all as an insurance against doing something stupid when equity markets tank, The latter is pretty much an arument for buying government bonds over corp bonds - giving up some yield in return for owning something that tends to perform when shit hits the fan. How much duration to have is more complicated and there is not really a clear answer. And there are times when you really dont want to buy bonds - like when yields are zero or negative. Thats a lot of downside for not much, if any, upside.

High-yield bonds is also from time to time an attractive asset class. They offer equity-like returns (8-10%) but with significantly less risk and generally dont have much duration. For retail investors in bond format to get diversification which is very hard to get on your own unless you have a fuckton of money as minium denomation on most bonds is quite high. HY bonds is a good thing to buy when times look most dire (like equities).

As an addendum the term "risk-free bonds" is heavily misunderstood. It really only means guaranteed repayment of principal. You still have interest rate risk and inflation risk so there aint no guarantee for your real return or any stability in market value of your holdings. If you bought ZROZ at its peak in 2020 you would now have lost 60% which is probs not quite what you expected from buying US govvies.

Bonds as an asset class are, in general, badly understood. And vastly more complex than equities despite the latter getting all the attention and being much sexier.

(edit: a few typos, probably some left, im not a native speaker and slightly intoxicated)

I don't feel 7-10yr is massively more risky.  IEF had a drawdown of -25% and currently down -22% vs TLT whose equvilients are -50% and -46% respectively.
But sure, keep it under 5yrs or stick to total bond market if you want to be boring safe.

[habanero]

I don't feel 7-10yr is massively more risky.  IEF had a drawdown of -25% and currently down -22% vs TLT whose equvilients are -50% and -46% respectively.
But sure, keep it under 5yrs or stick to total bond market if you want to be boring safe.

Yeah - if you have 5-6y og 7-10y isnt a big difference - dont disagree on that. TLT is around 16y duration i think. ZROZ is as much duration as its possible to get in the US afaik. Due to issuance in the long time with v. low interest ratres bonds in general have more duration than they used to which also feeds into the funds/ETFs of course.

The big distinction is if you stay in the short-end (say up to 2y just to pick a number), if you own the whole spectrum (dont know duration of that, but probably 8-9y in the US) or if you go for max duration like TLT or ZROZ. If you look only at nominal interest rates then long-term US govvies  isnt a bad deal, the current 30y yields around 4.50% and if you have faith in inflation getting down to the sacred 2% locking in a real return of 2.5% for 30y with no risk is a pretty decent deal. But it will be a bumpy ride in terms of market value of the holding so if you for some reason are depended on selling some of it to fund life it might look very different in the end.

I think bonds should be boring. The primary function should be to provide some decent return, lower portfolio volatility and also to have something off which one can rebalance when equity markets tank. There is a significant option value in having cash or cash-like stuff on hand when things get very cheap. If you're in 100% equities you just have to ride it out and cant really do much. In the (very) long term returns might be higher, but so will the volatility. As a colloraly this is mostly the reason to hold gold (I dont) it greatly reduces portfolio volalitity. Sometimes it even offer good returns.

Its not breaking news to this forum but a portfolio of equally-weighted allocatations to us equities, us government bonds, REITs, cash and gold has - hsitorically returned around 1% less than the S&P 500 but with significantly lower volatility. 1% per annum lower returns over time is serious money, no doubt, but the lower volatility - especially in the phase when one lives of the stash is not to be ignored.

US-based investors also pretty much have the luxury of ignoring FX risk, others not so much. Someone who lives in Europe and buys US bonds above all take FX risk, not duration/credit risk if they are bought on a non-hedged basis. Fun fact mentioned earlier, I dont know now but on an fx hedged basis, return on 10y japanese goverment bonds (yielding fuck all) was higher than on US treasuries (yielding 4.5% or whatever). When you buy anything on an FX hedged basis you basically pay the interest rate in the foreign currency and earn the FX rate in your home currency. So a japan-based investor pays 5.25% on the USD leg of the trade and recieves 0% on the JPY leg.

[ChpBstrd]

Can't blame y'all for focusing on treasuries. The spread between treasury and corporate bond yields is near historic lows.

This low credit spread is also a good argument to hedge risk exposure or take a hide-and-wait approach with bonds. Bond markets are getting greedy in the frenzy to lock in yield, but a recession could happen soon judging by the yield curves, Sahm indicator, and possible bubbles in AI stocks and real estate. Such a recession could send the default rate for lower end IG corporate bonds over 0.5% again, and could likewise send the BAA credit spread from today's 1.58% to 2.5% or 3%. If that happens all this reaching for yield will have been a big mistake.

[dividendman]

Yes, there could be a recession. People have been saying that for years now. The yield curve has been inverted for two years this month and still no recession.

[retired2022]

If the recession is as worse as during the 2007/8 financial crisis, it will be bad for Baa bond holders. However during the last official (covid) recession, it wasn't that bad when compare to 2007 and prior recessions. The question is will we see a repeat recession like 2007 or prior?? I guess that is the million dollar question.

[habanero]

Can't blame y'all for focusing on treasuries. The spread between treasury and corporate bond yields is near historic lows.

This low credit spread is also a good argument to hedge risk exposure or take a hide-and-wait approach with bonds. Bond markets are getting greedy in the frenzy to lock in yield, but a recession could happen soon judging by the yield curves, Sahm indicator, and possible bubbles in AI stocks and real estate. Such a recession could send the default rate for lower end IG corporate bonds over 0.5% again, and could likewise send the BAA credit spread from today's 1.58% to 2.5% or 3%. If that happens all this reaching for yield will have been a big mistake.

Yeah, I said the same upthread. That, however, is mostly an argument for owning government bonds rather than corp bonds.No retail investor invests directly in the credit spread - to do that you must buy a bond ans swap the fixed rate down to a spread over floating - then you are left with a pure position on credit spread and default risk but with no duration risk. if the yield cirve moves 100 bps down and credit spread blow out 50 bps you are still better off holding corp bonds as your acutal yield is still 50 bps higher than the alternative. This is something a retail investor cannot do.

Part og my bonds holdings are floating rate (indexed to a short-term money market rate) so it has close to zero duration risk but the bond maturity is somewhat longer - around 2y on average so you still harvest some credit premium. Given what said fund actually owns the default risk is very close to zero but Im slightly better paid for it. If short-term rates go up I will join in, if they go down I would in hindsight be better off with a fixed rate bond fund with more duration risk.

[habanero]

If the recession is as worse as during the 2007/8 financial crisis, it will be bad for Baa bond holders. However during the last official (covid) recession, it wasn't that bad when compare to 2007 and prior recessions. The question is will we see a repeat recession like 2007 or prior?? I guess that is the million dollar question.

During covid the fed pretty much backstopped all bondholders. Another financial innovation from the fed, if they hadn't it would have been really bad. Spreads blew out and contracted so fast that if you blinked, you missed it. Must be the shortest credit cycle ever. Once the Fed started buying everything a friend of mine maxed out his HOLC and boughtIG corp bond fund for everything. Reasoning was simple, if the fed is buying everything there is really no risk. Worked out fine for him.

[Phazed]

I am an active trader. Bonds are a good play if you believe that rates will not go up (much) from here. TLT is mid52 week  range (57% today). I like bonds just a little lower so I'm selling 90 puts. Whenever I close a put position, I take the profits and buy more TLT stock.  Once TLT gets a little higher, I sell calls against my position.

[Tigerpine]

I just learned about Israel Bonds today

https://www.israelbonds.com/Offerings-Rates/Current-Rates.aspx

Does anyone have any experience with them?

[ChpBstrd]

I just learned about Israel Bonds today

https://www.israelbonds.com/Offerings-Rates/Current-Rates.aspx

Does anyone have any experience with them?

No experience, but it takes real chutzpah to name a bond series "jubilee" or to invest in them.

[Tigerpine]

I just learned about Israel Bonds today

https://www.israelbonds.com/Offerings-Rates/Current-Rates.aspx

Does anyone have any experience with them?

No experience, but it takes real chutzpah to name a bond series "jubilee" or to invest in them.

Re: chutzpah, this is the Israeli government that's issuing the bonds, so there's that.

[vand]

Yes, there could be a recession. People have been saying that for years now. The yield curve has been inverted for two years this month and still no recession.

True. Just because an indicator has a 100% success rate in the past does not guarantee it will do so in the future.  But.. that said, historically the recessions started after un-inversion, not during.. so it's too early to confidently say we aren't likely to go into recession.

What has been said about the tight bond spreads above is also worth considering.  At the moment you are not being paid to hold riskier stuff, so best to steer clear of it and stick to govvies.  If you want higher yield then there are other investments available.

[vand]

I'm calling the top in the recent interest rate resurgence.

Just as everyone got too bullish on rate cuts back at the end of last year, sentiment has swung the other way and everyone is too bearish on them now.

I think bonds rally from here and interest rates go lower again.

Lollipop for me.

[ChpBstrd]

Yes, there could be a recession. People have been saying that for years now. The yield curve has been inverted for two years this month and still no recession.

True. Just because an indicator has a 100% success rate in the past does not guarantee it will do so in the future.  But.. that said, historically the recessions started after un-inversion, not during.. so it's too early to confidently say we aren't likely to go into recession.

What has been said about the tight bond spreads above is also worth considering.  At the moment you are not being paid to hold riskier stuff, so best to steer clear of it and stick to govvies.  If you want higher yield then there are other investments available.

https://finance.yahoo.com/news/asia-high-grade-dollar-bond-042035344.html

Credit risk and spreads had been falling for much of the year as investors chased elevated yields, and recession fears were put on the backburner, even though delinquencies have risen; the default rate for Bloomberg’s junk index climbed to 2.96%, crossing Covid era’s 1.8%.

[vand]

Its interesting, to me at least, watching the bond market.

The "Long TLT" trade that had many people convinced during 2023 hasn't really worked, as long term rates seem to be stuck above 4%.  That's not to say it might not work in the future, but those long bond funds are currently in the midst of another disheartening selloff.

Just shows that in real time, this stuff is hard. We could be looking at this in 12-24 months time and say "yeah, of course it was obvious that these rates would eventually come down" but at the time of writing it doesn't feel like that's a gimme.

[tooqk4u22]

Its interesting, to me at least, watching the bond market.

The "Long TLT" trade that had many people convinced during 2023 hasn't really worked, as long term rates seem to be stuck above 4%.  That's not to say it might not work in the future, but those long bond funds are currently in the midst of another disheartening selloff.

Just shows that in real time, this stuff is hard. We could be looking at this in 12-24 months time and say "yeah, of course it was obvious that these rates would eventually come down" but at the time of writing it doesn't feel like that's a gimme.

It worked until it didn't, although it still wasn't a bad time to buy as you still got the coupon if you held.   Its almost at the 2023 lows so its flat since then.   

It can't work well if inflation isn't really tamed, foreign governments aren't buying and there has been and still will be runaway deficits.   

Another thing, that I have railed against on this site a few times, is that it has been the practice of each administration for the last 15-20 years to mostly float 1-3 year issuances when it should have been issuing a higher concentration of long dated 10-, 20, 30- and should have even put 50-year offerings out.   But because politicians are f'ing morons and didn't want to absorb an extra 1-2% in their budgets for the long term sustainability of the nations finances we also now have interest expense that is 3x higher than it could have been.

Think about how much better it would be if post financial crises the Treasury floated significantly more long term issuances and that was even more amplified during pandemic (everything should have been long dated).  Same argument as having a 30 year mortgage - set it and forget.

So here we are.   

[ChpBstrd]

Another thing, that I have railed against on this site a few times, is that it has been the practice of each administration for the last 15-20 years to mostly float 1-3 year issuances when it should have been issuing a higher concentration of long dated 10-, 20, 30- and should have even put 50-year offerings out.   But because politicians are f'ing morons and didn't want to absorb an extra 1-2% in their budgets for the long term sustainability of the nations finances we also now have interest expense that is 3x higher than it could have been.

Think about how much better it would be if post financial crises the Treasury floated significantly more long term issuances and that was even more amplified during pandemic (everything should have been long dated).  Same argument as having a 30 year mortgage - set it and forget.

So here we are.

I don't know if the Treasury had the option to simply long-term-mortgage everything. Dumping a larger supply of long-dated bonds on the market would have depressed the prices of those bonds, thereby raising the interest rate. Had Treasury tried, they would have simply pushed the yield curve steeper - defeating their objective of issuing debt at the lowest possible cost.

We can debate the exact elasticity of the bond market, but it's fair to say demand for treasuries at any given term is not infinite. Treasury auctions could fail, and that situation would create instability because the government would have to rescue itself by printing money. 

This document from the Congressional Research Service is helpful to understand the thought process (see page 18). From that document:

Newly issued Treasury securities, sold to finance the operations of the federal government, are
offered at a mix of maturities in order to satisfy the provisions of the regular and predictable debt
management strategy and to minimize interest payments over time. The profile of securities is
also important due to its influence on liquidity. In addition, Treasury must make sure that it has
adequate cash balances available to pay federal obligations.Navigating among all of these
objectives leads to a strategy which offers a mix of short- and long-term securities.

Longer-term securities generally command higher interest rates compared to shorter-term
securities because investors demand greater compensation for incurring risk over a longer period
of time. Generally, a strong economy or higher inflation will be accompanied by higher interest
rates. If Treasury issues long-term debt during this time, they are committing to paying higher
interest rates for a longer period and may decide to purchase short-term securities. However, this
leads to uncertainties over the longer term, since the interest rate will likely change. During
periods of economic downturn and low interest rates, Treasury may decide to finance at longer
maturities to take advantage of lower borrowing costs. This, however, may lead to more volatile
and uncertain yearly interest payments because Treasury has to enter the market more often, and
involves a degree of uncertainty over future market behavior.

[tooqk4u22]

I agree that they can't do 100% long dated but my issue is that they skewed heavily toward short dated.  The attached chart demonstrates this.  All that 2023 maturity became 2024 and is now 2025 on top of the new debt fe
rom deficits.   1/3rd of all debt in next 11 months.   And that is why our interest expense has exploded on top of the exploding debt....and why rates are rising


The government has been going for the lowest possible cost at the expense of stability at a time when the marginal cost for that stability was very small.   Look at the maturities in  2029-2032, basically nothing.   Just stupid.   

Debt maturities really should be no more than 10-15% in any given year and given where rates were there was an opportunity to lower the maturities and push them out with 20 and 30 year issuances - only 18% of maturities are more than 10 years out and all are 20 and 30 year bonds. 

[habanero]

They also started reissuing  20y bonds in 2020 after not doing it for 34 years despite all primary dealers (the large banks) and their grandmother advised against it. No one wanted or wants those and the bonds have been trading at a discount all the time - so Uncle Sam pays more interest than if they had split the issuance in 10y and 30y. Current yield is around 0.2% higher than what interpolation between 10y and 30y implies.

[ChpBstrd]

They also started reissuing  20y bonds in 2020 after not doing it for 34 years despite all primary dealers (the large banks) and their grandmother advised against it. No one wanted or wants those and the bonds have been trading at a discount all the time - so Uncle Sam pays more interest than if they had split the issuance in 10y and 30y. Current yield is around 0.2% higher than what interpolation between 10y and 30y implies.

Talk about the mysteries of the world... this I do not understand. Would love it if someone had an explanation.

[habanero]

Talk about the mysteries of the world... this I do not understand. Would love it if someone had an explanation.

Not claiming to have the full explanation but:

The 20y area has always been bit of a dog on the US yield curve. In interest rate swaps its less liquid than say 10y and 30y and the same goes for the 20y treasuries. Volumes outstanding are much lower than for 10y and 30y, 30y offers more rate risk etc. Also in corporate debt space issuance in the 20y sector has all but died out so there appears to not be much investor appetite in that part of the yield curve for anything, really. In 2022 a futures contract on the 20y bonds became available but afaik liquidity in it is abysmal compared to 10y and 30y futures and definately noone ever talks about it in the market. 

One UST trader I spoke to a couple of years back said that even off-the-run 30y bonds with 20y remaining maturity (so issued 10y ago) are more liquid than freshly issued 20y bonds. Pickup was quite good in the beginning but auction sizes have gotten smaller over time. There is a rather active discussion as to if the US Treasury should stop issuing 20y completely and as said upthread the dealer community was not overly keen on this when the topic arose to start reissuing. They also discussed doing even longer - 40y or 50y (50y is not that uncommon in European goverment bonds. Austria has done 100y) to take advantge of the low yield environment in 2020 but the idea stranded as there appeard to be not reallt any investor appetite for it. Not that I blame investors - who on god's green earth would want to lock in almost no yield for 50 years?

[MustacheAndaHalf]

They also started reissuing  20y bonds in 2020 after not doing it for 34 years despite all primary dealers (the large banks) and their grandmother advised against it. No one wanted or wants those and the bonds have been trading at a discount all the time - so Uncle Sam pays more interest than if they had split the issuance in 10y and 30y. Current yield is around 0.2% higher than what interpolation between 10y and 30y implies.

Talk about the mysteries of the world... this I do not understand. Would love it if someone had an explanation.

I know less than habanero about this, but I recall there is significant demand from institutions who owe money in the future.  They buy 30 year treasuries to ensure they can meet their obligations in the future (insurance, pensions, etc).  I don't know why they ignore lower duration bonds, but there is significant demand specifically for 30 year treasuries that isn't interested in other maturities.

[BicycleB]

I agree that they can't do 100% long dated but my issue is that they skewed heavily toward short dated.  The attached chart demonstrates this.  All that 2023 maturity became 2024 and is now 2025 on top of the new debt fe
rom deficits.   1/3rd of all debt in next 11 months.   And that is why our interest expense has exploded on top of the exploding debt....and why rates are rising


The government has been going for the lowest possible cost at the expense of stability at a time when the marginal cost for that stability was very small.   Look at the maturities in  2029-2032, basically nothing.   Just stupid.   

Debt maturities really should be no more than 10-15% in any given year and given where rates were there was an opportunity to lower the maturities and push them out with 20 and 30 year issuances - only 18% of maturities are more than 10 years out and all are 20 and 30 year bonds.

These things are hard for me to understand, but reading the chart, it seems like 2023 debt was issued in very short term because rates were high then and a longer term would have forced the govt to pay more interest. Wasn't it better to keep the duration of borrowing short in the expectation that rates would drop?

[grantmeaname]

Yes, but there would have been less need to issue debt in 2023 if the government termed out its debt as long as possible in 2009-2022 when rates were historically low.

[tooqk4u22]

I agree that they can't do 100% long dated but my issue is that they skewed heavily toward short dated.  The attached chart demonstrates this.  All that 2023 maturity became 2024 and is now 2025 on top of the new debt fe
rom deficits.   1/3rd of all debt in next 11 months.   And that is why our interest expense has exploded on top of the exploding debt....and why rates are rising


The government has been going for the lowest possible cost at the expense of stability at a time when the marginal cost for that stability was very small.   Look at the maturities in  2029-2032, basically nothing.   Just stupid.   

Debt maturities really should be no more than 10-15% in any given year and given where rates were there was an opportunity to lower the maturities and push them out with 20 and 30 year issuances - only 18% of maturities are more than 10 years out and all are 20 and 30 year bonds.

These things are hard for me to understand, but reading the chart, it seems like 2023 debt was issued in very short term because rates were high then and a longer term would have forced the govt to pay more interest. Wasn't it better to keep the duration of borrowing short in the expectation that rates would drop?

So that is debt that was maturing in 2023, not issued.  They kept it short, more than half of the debt coming due in 2023 was issued in 2022 when 10 year rate started at 1.5% and ended at 3.88%, both were well below 2023 rates and the average would still have been excellent. Another quarter of it was 2 and 3 year debt issued at pandemic lows.

Yes, but there would have been less need to issue debt in 2023 if the government termed out its debt as long as possible in 2009-2022 when rates were historically low.

Exactly.   It is irresponsible to have a debt maturity schedule like it is.   

[tooqk4u22]

They also started reissuing  20y bonds in 2020 after not doing it for 34 years despite all primary dealers (the large banks) and their grandmother advised against it. No one wanted or wants those and the bonds have been trading at a discount all the time - so Uncle Sam pays more interest than if they had split the issuance in 10y and 30y. Current yield is around 0.2% higher than what interpolation between 10y and 30y implies.

Talk about the mysteries of the world... this I do not understand. Would love it if someone had an explanation.

I know less than habanero about this, but I recall there is significant demand from institutions who owe money in the future.  They buy 30 year treasuries to ensure they can meet their obligations in the future (insurance, pensions, etc).  I don't know why they ignore lower duration bonds, but there is significant demand specifically for 30 year treasuries that isn't interested in other maturities.

It's similar with the 7-year when compared to 5 and 10.

[vand]

Its interesting, to me at least, watching the bond market.

The "Long TLT" trade that had many people convinced during 2023 hasn't really worked, as long term rates seem to be stuck above 4%.  That's not to say it might not work in the future, but those long bond funds are currently in the midst of another disheartening selloff.

Just shows that in real time, this stuff is hard. We could be looking at this in 12-24 months time and say "yeah, of course it was obvious that these rates would eventually come down" but at the time of writing it doesn't feel like that's a gimme.

It worked until it didn't, although it still wasn't a bad time to buy as you still got the coupon if you held.   Its almost at the 2023 lows so its flat since then.   

It can't work well if inflation isn't really tamed, foreign governments aren't buying and there has been and still will be runaway deficits.   

Another thing, that I have railed against on this site a few times, is that it has been the practice of each administration for the last 15-20 years to mostly float 1-3 year issuances when it should have been issuing a higher concentration of long dated 10-, 20, 30- and should have even put 50-year offerings out.   But because politicians are f'ing morons and didn't want to absorb an extra 1-2% in their budgets for the long term sustainability of the nations finances we also now have interest expense that is 3x higher than it could have been.

Think about how much better it would be if post financial crises the Treasury floated significantly more long term issuances and that was even more amplified during pandemic (everything should have been long dated).  Same argument as having a 30 year mortgage - set it and forget.

So here we are.

If someone had predicted 3 months ago that the 10yr note would have risen by 100 bps over the same time that short term rates declined by 100 bps they would have been laughed out of the building.. yet that is what happened.. and it has the macro guys puking into their cereal

The charitable narrative is that the bond market simply does not believe the Fed, and doesn't believe that the neutral rate of interest is where Powell says it is, and/or that inflation will be more difficult to contain and no doubt pressured by the continual huge deficits being run up at a time when, if the economy really is as good as the headline numbers suggest, they should not be. 

To me the bond market is more important than the stock market to keep an eye on for 2025, as it is hinting at cracks in the popular narrative

[vand]

With the unusual situation of near term interest rate still being above long term rates, there is not the usual guarantee that long term rates will move down much (or at all) during the next rate cutting cycle... you may not get compensated for holding the longest duration bonds.  As such there is an arugment to keep your duration shorter - perhaps 7-10yr durations.

This was a good call in hindsight..

[ChpBstrd]

If someone had predicted 3 months ago that the 10yr note would have risen by 100 bps over the same time that short term rates declined by 100 bps they would have been laughed out of the building.. yet that is what happened.. and it has the macro guys puking into their cereal

The charitable narrative is that the bond market simply does not believe the Fed, and doesn't believe that the neutral rate of interest is where Powell says it is, and/or that inflation will be more difficult to contain and no doubt pressured by the continual huge deficits being run up at a time when, if the economy really is as good as the headline numbers suggest, they should not be. 

To me the bond market is more important than the stock market to keep an eye on for 2025, as it is hinting at cracks in the popular narrative

I agree about the bond market dragging the stock market in whatever direction it goes. Inflation, in turn, will drag the bond market in whatever direction it goes.

As I noted earlier this month in the inflation and interest rates thread, we've just seen 4 consecutive months of ~0.3% increases in Core CPI:



Core PCE, the Fed's preferred metric, has been a little tamer on a monthly basis, with a low reading in November. But on an annual basis, progress seems to have ground to a halt after June 2024:



All this comes together for an estimated Federal Funds Rate in the future (say, a year from now) that could be not much changed from the present. Both the futures market and the Fed's dot plot have been reducing their estimates future rate cuts in 2025.

I don't see the market thinking the neutral rate is higher than the Fed thinks, or thinking inflation is out of control for two reasons.

1) The FFR futures market has fallen into alignment with the Fed's December dot plot. Both sources now predict a 3.75% to 4% Federal Funds Rate at the end of 2025.

2) 5-year breakeven inflation is only 2.38% at the moment, compared to 2.5% PCE and Core PCE forecast for 2025 in the Fed's December SEP, with even lower inflation forecast in 2026 and beyond.

So the market believes that the Fed's projections about inflation and the FFR are both on target. Both the market and the Fed changed their projections after the December meeting, with the Fed making the first move and the market following after. This looks like a market that deeply believes the Fed's guidance.

At this point I think an economic slowdown is what's not on anyone's radar - not with GDP probably running near 3% growth, initial claims below 250k per week, rising forecasts for S&P500 earnings growth, and the predicted real estate bubble arguably behind us. However, experience shows that slowdowns can materialize in just a quarter or two. Recessions occur when GDP drops, not after. 

So either we get a recession that lowers interest rate expectations and boosts bond prices, or we get continued growth and normalization of the yield curve at levels that factor in a higher neutral rate. If this economy can grow 3%, against the headwind of a 1.5% to 2% real 10y interest rate, then the neutral rate might be around 3.5% to 3.75%, and the FFR/10y yield curve needs to be at least 1% wider than it is today. If the FFR settles in at 3.5%, for example, then the 10y yield, at 4.547% today, is at the low end of about right.

If we change our estimates just a little bit - 3.75% for the FFR and a not-unusual 1.5% term spread, then the 10y should yield closer to 5.25%. That would hurt.

So there's lots of downside for long-duration treasuries right now, and the upside consists of a recession leading to rate cuts. I'll pass on the bonds for now, thanks. But I'll also keep my stocks tightly hedged because high valuations leave them vulnerable to fears of recessions, rate hikes, or simply investor jitters. It's a good environment for early January profit-taking, with taxes not due for another 15 months.

The overall narrative is changing, now that the "soft landing" scenario has unfolded, inflation is showing signs of persistence, and it seems rate cuts are not going to be the thing supporting asset values during 2025. The new theme could be continued bullishness on AI or it could become a bearish tone that inflation is not yet dead, tariffs will reduce GDP growth, and rates may have to rise in the future. Investors are reluctant to declare an inflation comeback, after anyone who made that call after the fall of 2023 was shown to have overreacted to a short-term blip.

[habanero]

In other news 30y UK government bonds reached 5.35% yield - the highest since mid-1998.

[vand]

In other news 30y UK government bonds reached 5.35% yield - the highest since mid-1998.

Yes.. quite concerning for the new(ish) administration, imo. Something important will break soon if this keeps going.

[vand]

10yr annualised total return of various flavours of US bonds:

Total US Bonds: 1.2%
US 10yr: 0.55%
TIPS: 2.2%

vs
US CPI: 2.5%

With the 10y currently at 4.8% the next 10 years should be better than the last 10, at least in nominal terms.


In a recent memo, Howard Marks chew the fat and concludes that an allocation to fixed income likely worthwhile at these levels.

https://www.oaktreecapital.com/insights/memo-podcast/ruminating-on-asset-allocation

[Radagast]

I've basically been doing the same thing with respect to bonds for four years. I'm buying ZROZ with about 2/3 of new 401k money and a little also from HSA. The rest of 401k goes to RING, whichever is farther away from my allocation. For the past four years I have been 1.5 years of 401k contributions away from my target ZROZ/RING allocation, but market returns keep me steady at ~$30,000 short of ever reaching it. Any flat year and I'll catch up though.

Taxable accounts are similar. I doubled the VWALX target allocation as a possible house buying fund, but still a year of contributions from meeting that target. Savings bonds are getting maxed out as of last year, but still a year away from target allocation.

So while in theory my target bond allocation is 20% equally split ZROZ/VWALX/I-bonds, I've been nearly steady at around 15% total or 5% of each since 2020. Throw in an extra slice of VWALX for a hypothetical house. I prefer not to sell stocks to buy bonds, so I DCA in by buying with every pay check.

[BicycleB]

I've basically been doing the same thing with respect to bonds for four years. I'm buying ZROZ with about 2/3 of new 401k money and a little also from HSA. The rest of 401k goes to RING, whichever is farther away from my allocation. For the past four years I have been 1.5 years of 401k contributions away from my target ZROZ/RING allocation, but market returns keep me steady at ~$30,000 short of ever reaching it. Any flat year and I'll catch up though.

Taxable accounts are similar. I doubled the VWALX target allocation as a possible house buying fund, but still a year of contributions from meeting that target. Savings bonds are getting maxed out as of last year, but still a year away from target allocation.

So while in theory my target bond allocation is 20% equally split ZROZ/VWALX/I-bonds, I've been nearly steady at around 15% total or 5% of each since 2020. Throw in an extra slice of VWALX for a hypothetical house. I prefer not to sell stocks to buy bonds, so I DCA in by buying with every pay check.

What is RING?

[Radagast]

I've basically been doing the same thing with respect to bonds for four years. I'm buying ZROZ with about 2/3 of new 401k money and a little also from HSA. The rest of 401k goes to RING, whichever is farther away from my allocation. For the past four years I have been 1.5 years of 401k contributions away from my target ZROZ/RING allocation, but market returns keep me steady at ~$30,000 short of ever reaching it. Any flat year and I'll catch up though.

Taxable accounts are similar. I doubled the VWALX target allocation as a possible house buying fund, but still a year of contributions from meeting that target. Savings bonds are getting maxed out as of last year, but still a year away from target allocation.

So while in theory my target bond allocation is 20% equally split ZROZ/VWALX/I-bonds, I've been nearly steady at around 15% total or 5% of each since 2020. Throw in an extra slice of VWALX for a hypothetical house. I prefer not to sell stocks to buy bonds, so I DCA in by buying with every pay check.

What is RING?

Gold miner ETF (some sort of diversification, but not anything like bonds).

[habanero]

Looks a bit like US Treasuries are loosing their safe haven status in real-time now. This week is the biggest underperfomance of US 10y notes vs German Bunds (10y) since at least 1989 according to Bloomberg - the yield differential has moved 40 basis points (0,40%). Its been a while since one saw US equties, US Treasuries and the USD itself tank simultaniously. This has significant potential to get really ugly if stuff deteriorates further.

[jrhampt]

Looks a bit like US Treasuries are loosing their safe haven status in real-time now. This week is the biggest underperfomance of US 10y notes vs German Bunds (10y) since at least 1989 according to Bloomberg - the yield differential has moved 40 basis points (0,40%). Its been a while since one saw US equties, US Treasuries and the USD itself tank simultaniously. This has significant potential to get really ugly if stuff deteriorates further.

Too bad chaos king didn't foresee this when he was pissing everyone off and moaning about how badly we were being taken advantage of while those same people were holding lots of our debt...

[tooqk4u22]

Looks a bit like US Treasuries are loosing their safe haven status in real-time now. This week is the biggest underperfomance of US 10y notes vs German Bunds (10y) since at least 1989 according to Bloomberg - the yield differential has moved 40 basis points (0,40%). Its been a while since one saw US equties, US Treasuries and the USD itself tank simultaniously. This has significant potential to get really ugly if stuff deteriorates further.

Too bad chaos king didn't foresee this when he was pissing everyone off and moaning about how badly we were being taken advantage of while those same people were holding lots of our debt...

The idiot in charge never foresees anything other than what he proclaims......best bond market ever will be next comment. 

But really, there has been significant volatility in the 10yr for a while now, it was at 4.80 back in January and only got as low as it did last week because of significant fear, once the dust settled (ok maybe not settled yet) it marched back up to before and then higher to account for inflation and the fact that if you eliminate trade imbalances there won't be a need for other countries to buy treasuries......so dumb.   It's like they studied economics taught by two year olds....I take that back, even two year olds naturally understand supply and demand at a basic level.

[ChpBstrd]

As someone with stocks hedged by collars, and some decent dry powder, I'm getting excited about the chance to pick up senior debt from decent companies at high yields. Examples:

628530BJ5 Mylan pharma BB+ 4/15/48 YTW=7.85%
703481AD3 Paterson energy BBB- 10/1/33 YTW=7.812%
674599CF0 Occidental petro BB+ 6/15/45 YTW=7.732%
037411BG9 Apache energy BBB- 7/1/49 YTW=7.424%

One could build a pretty decent base income out of some bonds like these.

[habanero]

The idiot in charge never foresees anything other than what he proclaims......best bond market ever will be next comment. 

But really, there has been significant volatility in the 10yr for a while now, it was at 4.80 back in January and only got as low as it did last week because of significant fear, once the dust settled (ok maybe not settled yet) it marched back up to before and then higher to account for inflation and the fact that if you eliminate trade imbalances there won't be a need for other countries to buy treasuries......so dumb.   It's like they studied economics taught by two year olds....I take that back, even two year olds naturally understand supply and demand at a basic level.

One crucial difference between bond (and currency) markets vs equity markets is that the bond market is almost entirely made up of various flavours of professionals. There are no meme bonds and noone goes all in on any bond due to some person cult (Tesla). One of the, albeit unspoken, pacts in the world has been that foreign investors have been willing on a large scale participating in financing the massive US budget deficits. If they for some reason won't do that, at least on the same scale anymore, it has to be funded by other means. The current "plan" appears to be something along the lines of massive tariffs paid by foreigners, DOGE. And of course big tax cuts that gonne make the problem even bigger. The majority of the Federal budget in the US is tied up in stuff thats very hard to do anything about (defense, pensions, health care) and of couse interest payments, now more than defense spending. 

Given the administration in charge there is a non-zero probability that basically any weird shit can happen at any time.

[vand]

It's going to look hilariously bad for Trump if he's back off with the tariffs by enough to appease the bond vigilantes, only for yields to continue marching higher anyway... case of the Emperor's New clothes.  Markets will have their pound of flesh one way or another - it's the ultimate example of hubris that the Orange Baffoon thinks can control them

[habanero]

It's going to look hilariously bad for Trump if he's back off with the tariffs by enough to appease the bond vigilantes, only for yields to continue marching higher anyway... case of the Emperor's New clothes.  Markets will have their pound of flesh one way or another - it's the ultimate example of hubris that the Orange Baffoon thinks can control them

When it comes to issuing credit faith is crucial. The current US administration has managed to destory close to a century of the sort in less than 3 months. US Treasuries have now become a pretty risky investment - there is the "whatever the fuck are they gonna come up with next week" risk in addition to the already existing duration and inflation risk. As a side note "risk free rate" is poorly understood, its just an investment free of default risk by the borrower - its still possbile to lose a ton of money, just ask anyone long ZROZ for example.

[vand]

Long duration fixed income continues to plumb the lows and has destroyed wealth on an unimaginable scale over the last 5 years..

I recently saw a lady asking why her pension fund she had invested in over the last 20 years had done so poorly - it was up only a few pecent over that entire time across all the money she had put in it, and when she shared the funds she was invested it I immediately knew it was her large holding in long bonds that had done all the damage.


Looking the extended duration EDV fund
https://www.financecharts.com/etfs/EDV/performance

It has lost -57% since peak on a total return basis, however factoring in the 25% inflation we have had since then that gets revised down to -67%, ie it has lost 2/3rds of its purchasing power since mid 2020.

And where does that leave us? Well, the yield to maturity on the fund is still only hovering around 5%, so at constant yields and inflation rates it will take another 35-45 years just to regain the purchasing power you had at the peak.  That's a heck of a round trip just to get back to even. 

And this is very much a best case scenario - while back in the early 1980s the bond market had also lost a similar amount in real terms, the fundamentals were then in place for a strong bull market off the back of yields at 20% and the disinflation of the 1980s that saw it recover in real terms a little over a decade later - today there there is no such rosy scenario on the table for long bond holder, and it could yet be worse if inflation is persistently higher. 

[ChpBstrd]

As someone with stocks hedged by collars, and some decent dry powder, I'm getting excited about the chance to pick up senior debt from decent companies at high yields. Examples:

628530BJ5 Mylan pharma BB+ 4/15/48 YTW=7.85%
703481AD3 Paterson energy BBB- 10/1/33 YTW=7.812%
674599CF0 Occidental petro BB+ 6/15/45 YTW=7.732%
037411BG9 Apache energy BBB- 7/1/49 YTW=7.424%

One could build a pretty decent base income out of some bonds like these.

The bonds I quoted above on 4/11/2025 now yield:
628530BJ5   YTW=7.56%
703481AD3 YTW=7.098%
674599CF0 YTW=7.408%
037411BG9 YTW=7.206%

These 20 to 50 basis point reductions in yield coincide with the 30bp reduction in the spread between the indices. As the perceived recession odds went down, so did the premium investors required to invest in BBB companies as opposed to treasuries. Thus these BBB bonds rose maybe 2%.


In the historical context, corporate bond investors are currently being paid only a tiny yield premium over treasuries. This spread seems to pop much higher during periods of economic anxiety, such as late 2018, mid 2020, and 2022. 2% is probably a normal BBB spread, and we're just over half that, suggesting that credit risk is being underpriced right now.