Author Topic: Bond Opportunity  (Read 911 times)

centastic

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Bond Opportunity
« on: February 26, 2018, 05:46:18 PM »
It feels these days like everyone is certain that interest rates are going to increase, sending prices for existing bonds spiralling.

When everyone is certain of something, you know there are going to be good opportunities to make some money.

I think those opportunities are going to come from 1) corporate bonds, and 2) oversold long term government bonds.

Indeed, I have already profited quite nicely from the latter over the past six years. Countless times I have amassed long term bonds when a rate rise was "imminent," only to cash them all in when the rate rise didn't happen. The selloff is invariably exaggerated, and I think this pattern will continue for the next 5-10 years.

(interestingly, I stumbled across this strategy as a result of being forced to rebalance just before and again just after a rate announcement about six years ago)

And you know what the kicker is? If history is anything to go by it's almost certain that the next major crash will come as a result of increasing rates. So you can be buying these things cheaply, and then the bottom falls out of the market and suddenly everyone rushes to safety! Make sure you have your stink bids (offers, technically) set!

1) is less interesting. Basically due to the expectation of rising rates, companies are being forced to offer higher rates on their corporate bonds now (governments don't really have this option). So you can have a high-yielding asset now, and then use that money to invest in the stock market or elsewhere. And I think this is only going to become more enticing as time goes on! Especially as banks increase rates on fixed interest loans (the main competitor to corporate bonds from a company perspective) in anticipation of, you guessed it, rising rates.

Would be interested to hear your thoughts.

Radagast

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Re: Bond Opportunity
« Reply #1 on: February 26, 2018, 08:02:48 PM »
I don't really have an opinion on which way things will go, because I notice lots of people calling and getting it wrong (but in the opposite direction, as you say). I have a small allocation to long term government bonds because it might help me stay on track if stocks head for the deep south, and as a regular buyer on average I won't lose to stocks by much unless long term interest rates trend up over the next decade (and that possibility is why the allocation is small).
« Last Edit: February 26, 2018, 09:30:57 PM by Radagast »

CorpRaider

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Re: Bond Opportunity
« Reply #2 on: February 27, 2018, 01:22:05 PM »
Doubt you will get rich locking in a 10 year 2.9% nominal yield with inflation running 2%, but yeah maybe rates don't go up as much or as fast as some think.  Guess that has been right for 6 or 7 years now.  I don't think nominal losses in bonds were that bad even in the 70's, but you were smarting if you looked at after inflation numbers.

Probably better to set your allocations and rebalance.

jjcamembert

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Re: Bond Opportunity
« Reply #3 on: February 27, 2018, 04:33:29 PM »
I think bonds will continue to go down this year. The probabilities of a rate hike over the next 4 meetings are very high right now (>50%), so if I'm taking a shot in the dark it would be for bonds to go even lower.

Regarding flight to safety, I'm not sure if it's true anymore. Look at stocks and bonds during our little crash this month: the bonds kept going down.

I don't understand the corporate bond idea...companies aren't going to raise money to invest in the market AFAIK.

centastic

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Re: Bond Opportunity
« Reply #4 on: March 01, 2018, 03:57:03 PM »
2.9% nominal yield

The interest payments are good but actually I'm focusing on the cost of the underlying, which has seen swings of 20% in recent years.

I think bonds will continue to go down this year. The probabilities of a rate hike over the next 4 meetings are very high right now (>50%), so if I'm taking a shot in the dark it would be for bonds to go even lower.

Right, so you and countless others have already factored in the "inevitable" rate rises, hence they are already trading at less than their coupon value.

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Regarding flight to safety, I'm not sure if it's true anymore. Look at stocks and bonds during our little crash this month: the bonds kept going down.

I should have been a bit more specific. Bonds don't move opposite to stocks. Indeed, a strong economy is a sign that the government, receiving greater tax revenue, will be able to pay its bond obligations. However a prolonged downward swing in stocks would have people pre-emptively jumping into bonds for the guaranteed income at a time where there is uncertainty in dividends from stocks, pushing up bond prices.

It's the whiff of deflation in the air that sends people running to bonds. What happened the other day was just a correction, and the market responded accordingly.

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I don't understand the corporate bond idea...companies aren't going to raise money to invest in the market AFAIK.

Yeah this is the part I'm not too sure of myself, mainly because there is a lot I don't understand about corporate bonds. But I have seen corporate bonds issues with very competitive yields.

From what I understand, a company will raise money via bonds (instead of a regular loan) when they want to lock in a particular rate of interest (not necessarily because the rate of interest is a "good" one but because they want something stable to base their calculations on, to see whether the new venture would be profitable). We are currently in a kind of unique situation where there is such disparity between outlook for stocks (higher) and outlook for bond yields (lower). And this is where I think we might be able to find an opportunity.