Bonds

I'll do my best to keep this as brief as possible. My father is retired, has way too much time on his hands, and has convinced himself that the Corona virus is going to continue to wreak havoc on the financial markets. Thus, he believes that he is overweight on equities. Whether I agree or disagree with him is beside the point, however, he keeps asking me about bonds. Specifically, which ones he should buy. My knowledge on bonds is limited, so I thought I'd open it up to this forum to see if any valuable tips materialize. Thanks in advance.

Comments (15)

Feb 25, 2020

There is not much to get enthusiastic about in the bond market. The 10 year US Treasury has a yield of about 1.35%, which is I think is the lowest ever. I also think the curve must have inverted again. I could be wrong but I think the spreads on corporates are tight, as investors have been searching for yield. (the recent flight to safety might have changed some of that). I am not sure how conditions are in the muni bond market. You might try to persuade him to turn off CNBC and pursue another hobby.

Feb 25, 2020

TIPS

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    • 1
Feb 25, 2020

Buy Silver and Gold instead of bonds here

    • 1
Feb 25, 2020

A lot of people seem to forget that savings bonds exist. I am no professional, so for a casual investor like myself I think these are superb investments in the current rate environment. I series are at 2.2% right now, and EE series are like 3.3% if you hold them for 20 years. Yes, you read that right.

These rates may change after April. I wonder if they will make adjustment to the bonds based on expectations of a long period of low interest rates.

Fun fact for those that can't afford to drop 1k on bonds - these can be purchased on treasury direct in denominations less than $1k.

I tried.
Most Helpful
Feb 26, 2020

On Feb. 5, Direxion launched the Flight to Safety Strategy ETF (Ticker:FLYT) which invests in long T-bonds, utility stocks and gold bullion (the latter capped at 22.5% portfolio weight). It gets rebalanced quarterly to increase the weight of the component which has the lowest trailing 5-year volatility. It counts as an "active" ETF with the objective of beating the performance of an index called the Solactive Flight to Safety Index.

Current weights are Long T-bonds 45%, Utilities 33%, Gold 22%. Expense ratio is 40 bps.

Since inception Feb. 5, it gained 15.3% (thru Feb. 24 close), while the S&P 500 price return fell 2.2%. By comparison, gold bullion (SPDR Gold Trust), rose 6.6%.

Obviously this is too brief a sample of returns to draw any conclusions about the effectiveness of FLYT as a hedge vs. coronavirus, or any other event causing a market shock, but IMO it's worth keeping an eye on this interesting new ETF.

However, for anyone who thinks coronavirus will be an apocalyptic pandemic, the best investment right now would be to stockpile medical supplies ;-)

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Mar 12, 2020

I've been tracking FLYT - it has not been doing well.

Feb 27, 2020

If he's a safety guy I think he's a lot better off moving up the risk curve a tiny bit and buying some high yielding stocks like Verizon and Corning. If he's so worried about their risk, he can sell OTM calls on them and use that income to buy OTM puts so he's protected on the downside too. Much better than that shitty bond income because the stock yield is roughly inflation protected. Of course it's not guaranteed like TIPS but generally speaking the correlation of stock prices to inflation is decent enough. We're talking dividend yields of 4-5% with decent inflation protection, vs a TIPS yield of damn near zero.

Feb 27, 2020

Also, regarding virus, pasted below is my general view on the virus that I just posted in another thread:

-----

Just my take, the coronavirus is overblown as fuck. The latest dramatic media angle is that the flu death rate is only 0.1% while coronavirus death rate is 20x worse at 2%.

Just one problem, the flue rate is for all flu infections while the coronavirus rate is for confirmed cases. Confirmed cases are generally much worse, as the limited testing supplies force them to only test sicker people.

So we have a selection bias issue where coronavirus death rate is using a sicker denominator. Now you may wonder, how powerful is that bias? Well the flu death rate jumps to 7% among hospitalized flue patients. A 70x jump. So, yeah, pretty biased.

If 0.1% of all flu infections die, and 7% of serious flu infections die, and confirmed coronavirus cases are somewhere between mild and serious . . well then that 2% death rate sure does look awfully in line with the overall range for flu.

Will take time for media and public to absorb this among all the hysteria. Right now folks are actually dumb enough to say it's a bad thing that for every confirmed case there are many more mild, unconfirmed cases, while simultaneously touting the 2% death rate as high. Can't have it both ways.

When the dust settles, people will calm down. Banks are calmer than most as I can tell you they didn't cut summer classes too much during the financial crisis, a much more direct event for them. They cut a bit, and especially outside IBD. But IBD was only cut somewhat.

Feb 27, 2020
PteroGonzalez:

Also, regarding virus, pasted below is my general view on the virus that I just posted in another thread:

-----

Just my take, the coronavirus is overblown as fuck. The latest dramatic media angle is that the flu death rate is only 0.1% while coronavirus death rate is 20x worse at 2%.

Just one problem, the flue rate is for all flu infections while the coronavirus rate is for confirmed cases. Confirmed cases are generally much worse, as the limited testing supplies force them to only test sicker people.

So we have a selection bias issue where coronavirus death rate is using a sicker denominator. Now you may wonder, how powerful is that bias? Well the flu death rate jumps to 7% among hospitalized flue patients. A 70x jump. So, yeah, pretty biased.

If 0.1% of all flu infections die, and 7% of serious flu infections die, and confirmed coronavirus cases are somewhere between mild and serious . . well then that 2% death rate sure does look awfully in line with the overall range for flu.

Will take time for media and public to absorb this among all the hysteria. Right now folks are actually dumb enough to say it's a bad thing that for every confirmed case there are many more mild, unconfirmed cases, while simultaneously touting the 2% death rate as high. Can't have it both ways.

When the dust settles, people will calm down. Banks are calmer than most as I can tell you they didn't cut summer classes too much during the financial crisis, a much more direct event for them. They cut a bit, and especially outside IBD. But IBD was only cut somewhat.

Virus may be overblown but governments and citizen won't care. Once it hits the U.S. (like really hits it) commerce and consumerism is sure to slow, 1Q earnings will be shitty (and potentially 2Q), and the markets will take a downward turn. S&P has already turned negative YTD, and we haven't seen the worst of it. Could see a ~15% decline between now and May imo. Then once the virus gets behind us it'll just be catch up for the rest of the year.

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Feb 27, 2020

I think this is a market that gets ahead of things. Its tanking this week with only a couple cases in the US; naturally, that's in anticipation of many more cases to come. When those cases finally do come, I don't think it will dip more. If anything, people at that point may already be looking to cleverly get ahead of the rebound.

I've certainly been very wrong about this and have taken some pretty painful losses this week, so not claiming to know everything. But my suspicion is that anyone looking to sit this out or worse, go short today, would be taking on some serious risk that the market rebound happens sooner than expected. If it was the sort of game where everyone could just jump in when things are looking good, everyone would be playing it.

Mar 12, 2020
Dr. Rahma Dikhinmahas:

Just my take, the coronavirus is overblown as fuck.

This aged like milk.

Mar 12, 2020

Its still overblown. Its been a painful run down, but anyone with the guts to hold all the way through (or better, buy more now at today's prices) will be proven right in the long term.

Feb 27, 2020

Bond ETF or mutual funds are easier than buying an individual bond. Municipal bond funds if he is in a high tax bracket (yield is normally lower on these). Another idea mentioned above are high yielding dividend stocks to allow some growth and income.

    • 1
Feb 27, 2020

If he really wants bonds, would advise Agency MBS over treasuries.. the excess 100 bps of coupon is well worth the prepayment risk

Mar 13, 2020
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