The Telegraph’s Ambrose Evans-Pritchard wrote a must-read column this weekend titled “HSBC fears world recession with no lifeboats left”. Some choice excerpts:
“The world economy is disturbingly close to stall speed. The United Nations has cut its global growth forecast for this year to 2.8pc, the latest of the multinational bodies to retreat. We are not yet in the danger zone but this pace is only slightly above the 2.5pc rate that used to be regarded as a recession for the international system as a whole…”
“Stephen King from HSBC warns that the global authorities have alarmingly few tools to combat the next crunch, given that interest rates are already zero across most of the developed world, debts levels are at or near record highs, and there is little scope for fiscal stimulus…”
“In a grim report - "The World Economy's Titanic Problem" - he says the US Federal Reserve has had to cut rates by over 500 basis points to right the ship in each of the recessions since the early 1970s. "That kind of traditional stimulus is now completely ruled out. Meanwhile, budget deficits are still uncomfortably large," he said...”
“HSBC's Mr King says the global authorities face awful choices if the world economy hits the reefs in its current condition. The last resort may have to be "helicopter money", a radically different form of QE that injects money directly into the veins of economy by funding government spending. It is a Rubicon that no central bank wishes to cross, though the Bank of Japan is already in up to the knees. The imperative is to avoid any premature tightening or policy error that could crystallize the danger. As Mr King puts it acidly. "Many – including the owner of the Titanic – thought it was unsinkable: its designer, however, was quick to point out that 'She is made of iron, sir, I assure you she can'."
I don’t necessarily have a short-term target. Steen Jakobsen (Saxo Bank) released a note last week predicting a steep increase in bond yields in the second half of this year (due to a 2H rebound in GDP data, increased oil prices and Fed-induced panic similar to the “taper tantrum” of 2013), followed by new secular lows in yields in the first half of 2016. I tend to think bonds are impossible to predict over such a short time horizon, so who knows if he’s right, but Jakobsen is one of a handful of analysts out there that I pay attention to regarding the bond market. If his prediction plays out, I would look at it as a buying opportunity (dollar cost averaging every 25 bps).
Lacy Hunt, my favorite bond strategist, is on record predicting new secular lows in 30Y yields over the next 12 months (he avoids very short-term predictions). He foresees the yield on the 30Y eventually approaching the 2% range, and then staying at that grim level for a very long time. I’ve been in and out of 30Y treasuries three times over the past 5-6 years. This time may be different, though. If Lacy’s thesis plays out, that almost sounds like a depression to me, and I may just want to hold on to my 30Y bonds even at those low yield levels…
Updated to reflect today’s durable goods data, the Atlanta Fed’s GDPNow forecast ticked up to 0.8%, still well below Street consensus of around 3%. For those unfamiliar, the GDPNow forecast is a real-time GDP model (updated almost weekly), designed to mimic the BEA’s methodology for calculating real quarterly GDP. In the first quarter, the GDPNow’s final forecast was for real annualized growth of 0.1%, remarkably close to the BEA’s actual number of 0.2%.
Yeah, been hearing that for a long time. Periods of low interest rates in this country are not unique and have lasted about 35 years on average when they take hold. We're only in Year 6 of truly low rates (rates below the median). Take a look at a chart of long-term US interest rates from 1880-1915, or from 1932-1964. Or look at the low Japanese rates for the past 25 years (with no end in sight). We're witnessing the "Japanification" of the US economy, and the beginning of a multi-decade era of low growth, low inflation and low demand for credit. We're still in the early innings of this ballgame.
I'm guessing most investors use TLT as a trading/hedging vehicle. I prefer to hold individual bonds directly (I just come here to talk about the bond market because there's really no other place in yahoo finance to do it). I think US treasuries always have a role to play in a diversified portfolio. I buy short-term bills if I think inflation is a threat, and long-term bonds if I think we're in a deflationary environment (like now). I also hold blue-chip dividend payers, utility stocks, and a master limited partnership ETF (AMJ). I like 30Y treasuries at the moment because they're a pure play on interest rates (i.e., I don't have to think about ratings like I would for corporates or munis).
Long-term bond yields may be unpredictable in the short term, but follow fairly predictable patterns over the longer term (there's about an 80% correlation between long term bond yields and the inflation rate). I sold all of my 30Y bonds when yields were in the 2.50% range back in February, but have recently begun buying back in . Anytime you can buy 30Y treasuries at 300 basis points over the rate of inflation, it's generally a good value. If rates fall 100 bps from current levels (which I expect sometime in the next 12 months), that will equate to a 20% return.
The morons on CNBC are partly to blame for scaring retirees with their "sell your bonds, run for your lives" mantra. Remember back in late 2013, when every financial "journalist" and his pet rabbit were warning of a "rising interest rate environment"? Those stories continued well into 2014, as bond yields did nothing but go down all year (my favorite was a story from April 2014 titled "67 out of 67 Economists Predict Higher Rates in 6 Months!"). There are only a handful of bond strategists who truly understand the bond market - people should just tune the rest of them out.
Bond bear momo chasers who piled into TBT and TMV the past week are getting a harsh lesson that bond volatility works both directions. Investors on either side of the trade better have a coherent thesis as to where they think we’re headed, or they’re going to be shaken out. I suspect we’re going to see a lot more volatility going forward.
Remember when we made our "bet" back in the summer of 2013? TLT was trading at around $105/share, and you were convinced it was headed to $85/share, while I said it was headed to $125/share. It not only blew through $125/share, it peaked at around $137/share. There is something fundamentally wrong with our economy (that can be traced to our over-indebtedness) that makes this "recovery" different from every other recovery except the slow one during the Great Depression. We are basically in the process of repeating the Japan experience from the past 3 decades.
I buy my bonds on-line through Schwab, and actually use a strategy similar to yours. My latest purchases had coupons of around 3.75%. If rates continue to move up, I'll purchase bonds with lower coupons so that I get a bigger pop when yields inevitably go back down. As for shorting, there are ETF's for shorting long-term bonds, like TBF (inverse long-term bond fund); TBT (double inverse); and TMV (triple inverse). Those leveraged funds are an excellent way to lose money more quickly, as many found out in 2014.
WW2 helped get us out of the Great Depression, not just because our economy was juiced by increased exports to war-torn Europe, but because the US savings rate rose to extraordinary levels thanks to rationing. At the end of the war, everyone had essentially gone through a forced deleveraging, and had savings to burn. I heard someone ask Lacy Hunt how our current mess will end, and he basically said, "I don't know", which I found a bit unsettling. I've heard Lacy in interviews admit that short-term moves in bond yields are utterly unpredictable, so keep in mind that he has a longer-term outlook when you read his reports. His Q2 and Q3 reports from 2013 are particularly enlightening, as they were written at a time when yields were rising quickly and everyone was in a full-tilt panic about the Fed's coming "taper" of their bond purchases. Anyone who listened to him would have ended up making about a 30% return on their long-term bond investments in 2014...
In the few historical instances where we've seen a major financial crisis combined with a severely over-indebted economy, long term rates didn't bottom until 14 years after the financial crisis (although Japan's recent experience is going to extend that average time period even further). We likely won't see a true bottom in rates until at least 2022 (probably later). Until then, we'll be stuck in a trading range, and sometime in the next 12 months I expect to see rates fall lower than most investors believe possible.
Per Bloomberg, investors in Japan bought $23 billion of US debt in the month of March. From the article: “The Bank of Japan is purchasing bonds to support the economy, while the Federal Reserve prepares to raise interest rates, and the divergence means fund managers can pick up more than 150 basis points of yield by buying 10-year Treasuries instead of their local debt. “Investors have to buy high-yield and high-quality bonds,” said Hideaki Kuriki, a fund manager in Tokyo at Sumitomo Mitsui Trust Asset Management, which has the equivalent of $56 billion. “That is U.S. Treasuries.”
So if you are short treasuries at the moment, you are now fighting the Bank of Japan...lol
I think you're referring to the latest update from the Atlanta Fed's GDPNow forecast. Their Q1 forecast of 0.1% was right on the money (compared to the BEA's first estimate of 0.2%, which we now know will be revised down to around -1.0% based on the trade data from last week), and signaled a slowdown long before the street consensus caught up to reality. I'm wondering if we might just be in the middle of a technical recession.
My current target was a 3% yield on the 30Y, so I pulled the trigger at the 3.05% level this morning. If yields keep moving up, I'll buy more at 3.25%, then 3.50%, etc. The current price action reminds me of the "taper tantrum" in late 2013 (I also bought then, using the same dollar-cost averaging strategy). Even though yields were higher at that time, the current yields are arguably a better value, as our 0% YoY inflation rate is much lower than it was then. I'd love to see a bond flash crash, to go all in...
There's only one person here talking about a 5% yield on 30Y bonds, and he has no idea what he's talking about. For the past 140 years, the yield on 30Y bonds has averaged around 200 basis points over the rate of inflation. A 5% yield on the 30Y would mean that inflation was back around the 3% level, but it's not.
You could have said the same thing about TLT in the first 3 weeks of September (when the yield on 30Y bonds increased 30 basis points), but if someone had sold then, they would have missed the huge move from October through January. You could also say the same thing about a number of dividend stocks and REITS currently. It all depends on where you think the real economy is headed over the next 6-12 months.
The answers to all your questions can be found in taocentric’s lengthy post on this message board on 12-11-13 (when TCS was trading at around $38/share). Here’s an excerpt:
"In my estimation, the intrinsic value of the business is somewhere less than $15.00 per share. This implies an 11x forward EBITDA multiple (which is way too high given the growth trends) and an enterprise value of about $1.1 billion. Although, with unlevered FCF of only about $20 million, I would not be a buyer of TCS shares at $15.00. I would be a seller. At a 9x forward EBITDA multiple, the implied share price is about $10.00. Don't forget…the private equity owners and founders were sellers at $18.00 per share. Don't be the fool buying this stock here at $38. I read the Wall Street research reports issued on TCS - I will not single out any particular analysts, but suffice to say that their reports border on gross negligence."
He claimed he was shorting 30,000 shares at the time, and I believe him. He rode that short down from $38/share to around $18/share. Everything the guy said was going to happen has come to pass (except for a dilutive secondary offering, which is probably going to happen eventually).
I've been in and out of 30Y bonds three times in the past five years. I can't even remember a time when you could buy the 30Y at 300 basis points over the rate of inflation (yields on the 30Y have averaged 200 bps over the inflation rate for the past 140 years). The momentum chasers are about to provide us with a nice buying opportunity...
I think so, but anything can happen in the short term. The current move in yields reminds me of the "taper tantrum" in 2013, which provided a great buying opportunity in the fall of that year.
Based on past experience, I know I don't have the stomach for the large price swings of 30Y zero coupons. I like receiving a quarterly interest payment (I stagger my bonds so that I receive the interest quarterly) , which makes it easier for me to be patient while my longer-term thesis plays out. You are correct, though, in that there is a trade-off between higher coupons and price swings of the underlying bond. By the way, if you are serious about studying the bond market, I highly recommend that you go to the Hoisington Management website, where you can download Lacy Hunt's quarterly reports (they're free). I have a degree in finance, but I've learned more about the bond market by reading those reports than I ever did in business school. Lacy Hunt is a rare bird - he's both a superb economist and a long-time historian of the US treasury market...
I can't think of why there would be any tax advantages one way or another. I prefer buying bonds directly because I can obtain more duration that way (I think the duration of TLT is around 17.5 years, whereas I can get the duration of my portfolio over 20 years by buying 30Y bonds directly). Longer duration means bigger price swings...