Bonds !!!

[tooqk4u22]

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.

You are not wrong, bonds in general but especially long duration have gotten crushed.   Facts are facts but cherry picking the high to the low is another thing too.  You somewhat referenced it but you could just as easily have said if you bought bonds in 1980 at 16% you would have made a killing on interest alone and another killing on principal appreciation.   That's why there were bond kings back then.   It was a 40 year bull market for bonds...crazy....which ended with the bubbles of all bubbles during the pandemic and the fed.  You would have done pretty good if you bought EDV in 2008 and sold in 2020 -  85%+/- capital gain plus interest, that's not too bad......but if you held though now you would have a capital loss of 35% plus interest so maybe breakeven all in if held in tax-deferred account.

What does that mean for bonds now, I have no idea but they are certainly better valued than they were 5 years ago and in line with the long term median/mean (but there are a lot peaks and valleys throughout).

Anyway, long duration is a whole different thing than buying BND or even the 10 year.   

[tooqk4u22]

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.

Out curiosity I checked a couple intermediate funds:

                                                                            YTM             Duration
Vanguard Total Bond                                              4.5%               5.8yrs
Vanguard Intermediate Treasury                             3.8%               4.9yrs
Vanguard Intermediate Investment Grade                5.2%               6.2yrs

So spread is 1.40%, which is in line with your data mostly. But duration is higher, my guess is that it is attributed to the fact that there just aren't enough longer dated bonds since the treasury issued so little of them over the last 15 years to borrower at lower rates offered by shorter terms with a byproduct of keeping longer term rates lower (ie less supply).  But now the fed budget is getting hammered because of those foolish less pragmatic decisions.

[vand]

You are not wrong, bonds in general but especially long duration have gotten crushed.   Facts are facts but cherry picking the high to the low is another thing too.  You somewhat referenced it but you could just as easily have said if you bought bonds in 1980 at 16% you would have made a killing on interest alone and another killing on principal appreciation.   That's why there were bond kings back then.   <snip>

I used those dates contrasting 2020 to the early 1980 to illustrates that when talking about any asset the context matters..  There's a time and place for ovrweight exposure to anything when the conditions are right, and a time for under (or no exposure) when the conditions are the opposite.. just hiding behind averages doesn't tell us anything and, worse, can get you killed if you cannot survive the barren periods -  quoting Howard Marks, never forget the the 6ft man who drowned crossing the river that was 5ft deep - on average.

[tooqk4u22]

You are not wrong, bonds in general but especially long duration have gotten crushed.   Facts are facts but cherry picking the high to the low is another thing too.  You somewhat referenced it but you could just as easily have said if you bought bonds in 1980 at 16% you would have made a killing on interest alone and another killing on principal appreciation.   That's why there were bond kings back then.   <snip>

I used those dates contrasting 2020 to the early 1980 to illustrates that when talking about any asset the context matters..  There's a time and place for ovrweight exposure to anything when the conditions are right, and a time for under (or no exposure) when the conditions are the opposite.. just hiding behind averages doesn't tell us anything and, worse, can get you killed if you cannot survive the barren periods -  quoting Howard Marks, never forget the the 6ft man who drowned crossing the river that was 5ft deep - on average.

I think there are times when things are way over done in one direction or another and its obvious as can be but for many either fear/negativity or greed/optimism win out and either keep people out of or in the investment for too long.   

I think the middle 80% or the range is far more difficult to ascertain.  Right now for instance, are bonds bottoming or half more room to fall or will they rally - as said above yields are in line with historical averages so that better than the extreme but as you say if yields go to 8% then bonds get crushed but if they go back to 2-3% they rally and do well.  IDK.   

Personally, I when covid hit and rates went to zero across all durations I moved almost all of my bond AA to cash or ultra short duration (and some into equities).  Even now I am mostly money market or short duration but over last year and half have moved bits to BND (intermediate duration) any time the 10 year UST has crossed 4.5%.  I am probably up to about 10% of my AA in BND now and basically at yields where they are today (so no gains).  If I was smart and a trader I would have sold when rates when down.

Don't know if it will be good or bad but really my overall duration mix of my cash/bonds is probably around 2 years so clearly I don't have high conviction of what direction rates will go.

I think as long as governments keep buying/hoarding gold and the trade nonsense I don't see how yields go down materially unless there are obvious signs of a recession. The deficit is another problem but that is the tail wagging the dog of gold and trade.

[LightStache]

Any thoughts on Jamie Dimon predicting a crack in the bond market?

I assume this is mostly focused on US treasuries and Japanese gov issues. Since Nov I've had an increased allocation to US and foreign bonds, thinking of reducing that to raise some cash.

[Must_ache]

How about something bondlike, maybe JAAA or PAAA or CLOX?  AAA collateralized debt obligations?  Plus their less-secure companions JBBB and CLOZ?

[LightStache]

How about something bondlike, maybe JAAA or PAAA or CLOX?  AAA collateralized debt obligations?  Plus their less-secure companions JBBB and CLOZ?

Those are good suggestions. For now I sold a bit of my US bond ETF to get back to my target allocation. Still overweight ex-US bonds.

I'm going to sit on the cash for a minute. It seems like I've been trading a bit more than what's prudent.

[ChpBstrd]

10Y rates have been bouncing around since January, as if investors cannot decide whether to brace for recession or high inflation.   

30Y rates have been in a rising trend since September 2024, with a big exception occurring around the peak of the tariff wars, when rates fell sharply. These investors have more at risk because their duration is higher, so I would expect to get a better read of the latest thinking and underlying trends from the 30y than from the somehow-noisier 10y.

So the pattern is this:

As high tariffs become more likely, investors start to anticipate a recession occurring soon. This would be accompanied by falling interest rates, which would cause existing bonds to appreciate. Thus, at the height of the March-April tariff war, investors were bidding up the price, and thus bidding down the yields, of long term bonds.

Note that there could have been a different narrative. Investors could have interpreted tariffs as a cause of systemically higher inflation and higher rates in the future. They could have anticipated lower demand for treasuries from foreign exporters who were unable to sell as much. If they'd thought that way, they would have sold duration instead of buying it! Instead the exact opposite happened.

Now that we know how bond investors think and how they don't think about tariffs. They have showed us their playbook. The bond market thinks tariffs will lead to a routine recession, rate cuts, and eventual rescinding of the tariffs. Narratives of stagflation are currently seen as unlikely, despite the outcry of economists and financial media.

That said, their play failed spectacularly. From the bottom on April 3, the rate on 30y treasuries rose 0.59% - even more than that if you measure from the top on May 20. Those who bought in the late March and early April timeframe are nursing nasty red paper losses. It's fair to ask whether they'll run the same play when tariffs increase again.

Now that the stock market has recovered, we could be lining up for another cyclical bout of tariffs. The China truce is already breaking down amid bilateral accusations, and even if Trump keeps his word for three whole months, we're well on our way through the 90 day negotiated agreement.

Another round of the tariff war might mean a similar fall in interest rates as occurred the first time. That would mean quick profits on TLT, ZROZ, or EDV. But you'd want to take those profits quickly to avoid the fate of bond buyers after Trump's last flip flop.

TACO trading means getting in alignment with the crazy. Stocks have recovered from their April lows, as has Trump's approval rating. This means Trump has more latitude to advance again on his agenda. I suspect now might be a good time to buy high-duration bond ETFs, so that you can sell it when recession seems imminent again. There is always a risk of a grand China deal being announced, but that wouldn't necessarily mean rising rates. Long term rates are already twice the rate of inflation, and over twice the 5-year breakeven implied by TIPS-nominal pricing. So if you're OK with earning just a 5% yield, you might earn another 5% in capital gains over the next 3-5 of months. 

I don't see conservative bond traders adopting the Democratic party line that tariffs will lead to high inflation or stagflation, but maybe wait for the May CPI report to judge what happens next.

[Radagast]

Sold tax exempt bonds to buy a house. I am now down to a 10% bond allocation, split between ZROZ and I-bonds. I'll be building slowly building that back up. I'll have to look at the value of tax-exempt bonds versus mortgage rates before buying more of those though.

[tooqk4u22]

10Y rates have been bouncing around since January, as if investors cannot decide whether to brace for recession or high inflation.   

30Y rates have been in a rising trend since September 2024, with a big exception occurring around the peak of the tariff wars, when rates fell sharply. These investors have more at risk because their duration is higher, so I would expect to get a better read of the latest thinking and underlying trends from the 30y than from the somehow-noisier 10y.

So the pattern is this:

As high tariffs become more likely, investors start to anticipate a recession occurring soon. This would be accompanied by falling interest rates, which would cause existing bonds to appreciate. Thus, at the height of the March-April tariff war, investors were bidding up the price, and thus bidding down the yields, of long term bonds.

Note that there could have been a different narrative. Investors could have interpreted tariffs as a cause of systemically higher inflation and higher rates in the future. They could have anticipated lower demand for treasuries from foreign exporters who were unable to sell as much. If they'd thought that way, they would have sold duration instead of buying it! Instead the exact opposite happened.

Now that we know how bond investors think and how they don't think about tariffs. They have showed us their playbook. The bond market thinks tariffs will lead to a routine recession, rate cuts, and eventual rescinding of the tariffs. Narratives of stagflation are currently seen as unlikely, despite the outcry of economists and financial media.

That said, their play failed spectacularly. From the bottom on April 3, the rate on 30y treasuries rose 0.59% - even more than that if you measure from the top on May 20. Those who bought in the late March and early April timeframe are nursing nasty red paper losses. It's fair to ask whether they'll run the same play when tariffs increase again.

Now that the stock market has recovered, we could be lining up for another cyclical bout of tariffs. The China truce is already breaking down amid bilateral accusations, and even if Trump keeps his word for three whole months, we're well on our way through the 90 day negotiated agreement.

Another round of the tariff war might mean a similar fall in interest rates as occurred the first time. That would mean quick profits on TLT, ZROZ, or EDV. But you'd want to take those profits quickly to avoid the fate of bond buyers after Trump's last flip flop.

TACO trading means getting in alignment with the crazy. Stocks have recovered from their April lows, as has Trump's approval rating. This means Trump has more latitude to advance again on his agenda. I suspect now might be a good time to buy high-duration bond ETFs, so that you can sell it when recession seems imminent again. There is always a risk of a grand China deal being announced, but that wouldn't necessarily mean rising rates. Long term rates are already twice the rate of inflation, and over twice the 5-year breakeven implied by TIPS-nominal pricing. So if you're OK with earning just a 5% yield, you might earn another 5% in capital gains over the next 3-5 of months. 

I don't see conservative bond traders adopting the Democratic party line that tariffs will lead to high inflation or stagflation, but maybe wait for the May CPI report to judge what happens next.

Decent assessment.   

The 10yr will see through the tariffs if everything else stays relatively stable as the tariffs are one time in nature and not an ongoing source of inflation (continued and increasing deficits are another story) and you are right that if recessionary indicators (not just feelings) start to permeate then the 10 year will decline or at least not rise further as an offset to the deficit issue).

The 30 year is a bit different as the antagonistic policies toward trading partners has devalued confidence in the US overall such that gold reserves are being increased vs holding US treasuries,  which will be further exasperated by low trade imbalances and again increasing deficits (we really really need trading deficits to have buyers of our debt from fiscal deficits).

The other thing that is weird right now is the dollar is down while rates are rising and that is probably almost entirely attributed to the trade tensions. 

ETA: none of it really matters because as you eluded to it really depends on what mood Trump is in at any given moment.  How do possibly handicap that?

[ChpBstrd]

30y treasuries have been in a swift downtrend since 5/20, falling from 5.09% then to 4.877% today. I think the trend will likely continue all the way down to about 4.75%, so I bought $9,800 worth of EDV today, after unfortunately watching its price go up 2.75% this morning on a -0.11% change in the 30y yield spurred by a weak ADP jobs report. Meanwhile Trumpian tariffs continue to be enacted willy nilly - this time on Europe. I was generally right in the above analysis, but late to act on it.

I will only hold this position for a week, and will likely sell out prior to the May CPI report, to be released June 11. That CPI report could very well come in hot, due to:

• mean reversion and measurement error, considering how tame the April CPI report was,
• the earliest effects of price hikes from the tariff war,
• fast rising commodities - the GSCI index is up +3.86% month over month, and
• tight employment pushing wages up and, with a lag, pushing services inflation up.

A surprise hot inflation report could push yields up, so I don't want to hold duration though that risky period. But I think I'm likely to make a couple percent over the next few days with relatively limited risk.

Anecdotally, the reddit sentiment from retail noobs on r/bonds is very sour, so that's a bullish sign too. They're still hurting from the pounding they received in May, and more broadly since September.