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.