There Has Been No Safety in Bonds

We all know stocks have been hammered but the bond market is not doing that much better.  I do not remember a time when bonds have performed this poorly.  I do not have access to good data but what has happened might be reaching record setting levels in a bad way.  
 

i think the sky rocketing yields has to be an issue for stocks.  Until recently,  stocks had no competition from bonds.  With the 10 year treasury at 3:45%, there might be more interest in bonds.  

Comments (16)

Jun 14, 2022 - 5:51pm
BenBernyankin', what's your opinion? Comment below:

I have heard quite a bit of people talking about getting out of stocks and into bonds. I couldn't disagree more; fixed income makes sense if you're entering retirement age and want to reallocate to a conservative/low risk portfolio. However, I've been telling people to park $10,000 into I-Bonds, the 9.62% rate is a no brainer. 

Otherwise, I just see the drop in equities as a discount and buying hand over fist when we print new weekly/monthly lows, and selling cash-secured puts on stocks @ prices I'd be glad to own it at. Definitely would avoid the cash-burners/highly levered companies and just stick to companies with good MOAT and growth potential. 

Jun 15, 2022 - 9:24am
thebrofessor, what's your opinion? Comment below:

worst bond market since 1842 according to WSJ. the question remains - is inflation truly transitory (as in we'll see 7-9% for the full year but next year will settle down) or will it persist longer? 

the trouble with bubbles is they take a while to work off, like the tech bubble took 3 years of negative declines to get back to cheap valuations, the nifty fifty/stagflation took even longer

I don't believe long term investors will look to bonds unless things get as crazy as they did in 1980-1982 when you could get >15% on 30 year treasuries, but I can speak for the boomers in my clientele that they are definitely more open to bonds as rates get higher, but the inflation question still remains

I think just due to the shitty start this year had, you could see a bear market bounce, but I'm not backing up the truck in bonds yet, instead hanging onto some cash and being patient

Jun 15, 2022 - 9:38am
NoEquityResearch, what's your opinion? Comment below:

Get into bonds when you think the Fed is close to peak rates.  If you got into double digit interest rate bonds in the 80s and then watched rates get slashed, you made a killing. It's all about interest rates and how high they will go before inflation is tamed. As long as you think rates are still going higher, don't get into bonds.

Jun 15, 2022 - 9:44am
thebrofessor, what's your opinion? Comment below:

on the last point "don't get into if rates are going higher" I think this depends on maturity and your goals. absolutely can be said for long bonds, but short/intermediate, if they provide a nice return above inflation and you're reinvesting coupons at higher rates, not a bad place to be (better than cash anyway), just be ready to stomach some volatility before they get pulled back to par

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Jun 15, 2022 - 10:24am
ThiccPik, what's your opinion? Comment below:

The thing that I personally believe is that the word "inflation" is really muddled at this point. While it's defined as a decrease in the value of fiat currency, we measure it based on CPI and other price measures. This is a good-but-not-perfect measure, because things like the China trade war and COVID and the Ukraine Invasion and Global Chip Shortage clearly caused increases in prices due to supply shocks in goods and energy. Supply shocks causing prices to rise is not real inflation because these shocks will, eventually, dissipate. 

Accordingly, I believe that an outsized amount of the "inflation" - or increase to CPI - that we are seeing is, in fact, transitory (relative to other inflation crises). Car prices are sky high and are a huge part of CPI, for example. I'm not saying that real inflation isn't rising - it clearly is - but I think that many investors, especially retail investors, are over correcting. Yes, there is a meme about money-printer, but the reality, in my opinion, is that demand existed - and will continue to exist - for those dollars as global investors fly to safety. When demand drops for dollars, we will have an issue with real inflation, but I just don't see that happening (just look at Fx rates).

Once supply lines start to loosen up (ironically, china's no-covid policy combined with loosened restrictions in US could ease the shipping traffic in 22/23) I think prices will start to fall. You can already start to see this with medium-ticket items (e.g. furniture) that were hard to get in 20/21 that are now declining in price due to pre-ordered supply showing up amid reduced demand. Once the chip shortage starts to abate,  cars are next, and as mentioned, THAT is the bogey - where we will see CPI start to decrease. 

In summary - I believe that real inflation is being overstated by non-money supply issues. 

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Jun 15, 2022 - 5:20pm
financeabc, what's your opinion? Comment below:
ThiccPik

Accordingly, I believe that an outsized amount of the "inflation" - or increase to CPI - that we are seeing is, in fact, transitory

This comments reminds of the topic about the biggest lie you have ever heard at work or something like that.  Unless I am missing something here, if the Fed is hiking rates by 75 bps at a time, they must no longer think it is transitory.  

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Jun 15, 2022 - 4:22pm
Addinator, what's your opinion? Comment below:

https://read.nhbr.com/nh-business-review/2021/06/18/#?article=3820174

In other words, a corollary to what we could be in for today. 50 high flying, can't miss, 'golden' stocks - IBM, Xerox, JCPenny, Kodak, etc. whose valuations and premiums got stretched - then annihilated as Nixon battled stagflation, pulled from gold standard, etc. Obviously took quite some time for many of these to come back, some never did. In that case it took decades for them to come back. 

On the bonds front - the curve is basically pancaked at this point, begging to invert itself aggressively. 2's and 30's are basically flat at this point. Some areas around the belly are inverted ever so slightly. The only steepness is basically under a year at this point. Everyone is piling in to shorten as much as possible, WAM's coming down, durations running shorter than benchmarks either at neutral or even below. Not necessarily a fun place to be if you are trying to manage portfolios right now. Pain everywhere - your best bet is to do your best to find value where you can, stay as short as possible, buy anything with a spread that you are reasonably confident won't default near term. Long term still has structural buyers - pension funds, insurance companies - but it would appear that it's not pricing in a massive sustained inflationary period (otherwise I'd think you'd see 30 year a good bit higher IMO). 

With something like 9 (or whatever) rate hikes baked in at this point, I do think that we are getting towards a decent entry point (I've already started to enter a position.. blah) on bonds. I view a recession as almost unavoidable at this point, with the Fed at some point this year unwinding those rate cut expectations or outright cutting at some point in the back half of the year. But, as with anything, who knows. Been wrong plenty this year. 

Jun 15, 2022 - 5:04pm
financeabc, what's your opinion? Comment below:

thebrofessor

worst bond market since 1842 according to WSJ.

1842, with an 8?

I had to verify it and you are correct.  Wow, that even goes back before I started following markets, not by much though, haha

Jun 15, 2022 - 9:35am
NoEquityResearch, what's your opinion? Comment below:

Are you not a business school graduate man? This is like Fixed Income 101.

No big surprise why bonds are doing badly. Interest rates are up. The relationship is inverse. Skyrocketing yields on bonds practically have nothing to do with stock prices other than the general macroeconomic effect of rising rates, more expensive financing, and the resulting lower demand in the economy.

Jun 15, 2022 - 5:12pm
financeabc, what's your opinion? Comment below:
NoEquityResearch

Are you not a business school graduate man? This is like Fixed Income 101.

No big surprise why bonds are doing badly. Interest rates are up. The relationship is inverse. Skyrocketing yields on bonds practically have nothing to do with stock prices other than the general macroeconomic effect of rising rates, more expensive financing, and the resulting lower demand in the economy.

It is hard to tell who this is directed at.  The magnitude of the declines in prices is what I think is so unusual. 

Jun 16, 2022 - 4:46am
TheBuellerBanker, what's your opinion? Comment below:

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