It’s not rocket science: 1) you buy conforming mortgages; 2) securitize them; 3) stamp them with a government guarantee; and 4) sell the newly risk-free securities for a profit. 99% of the value creation is Step 3, the government’s guarantee. Why allow some quasi-public entity to use Uncle Sam’s balance sheet and keep all the profits, while taxpayers are on the hook if things go wrong? A few thousand civil servants at Treasury could accomplish the exact same thing, and allow taxpayers to keep 100% of the profits.
I've got a tip for you based on your thesis. You should load up on TMV, the triple inverse bond fund. Put everything you own in it, maybe even buy it on margin if you can!
Okay, I'll play. How exactly do you see TLT at 140? The interest rate on the 30-year would have to be close to 2% for TLT to reach that level, implying the world was in a deflationary collapse. Is that what you think? In July of 2012, TLT reached $132/share, when the yield on the 30-year was 2.45%, and that's about the highest we've seen it. It's hard for me to see TLT at 140 anytime soon (although someday perhaps), but I'd be curious to hear your thoughts.
I had a feeling you might rethink TBT if it got to $65, because it would mean strange things were happening. I still think the long bond has another 50-60 basis point drop left in it. If it gets back down to the 2.8% range, I'll probably think about selling my bonds. But if the world at that time looks like it's headed for a deflationary collapse, I might even hang on longer. Sometime in the next few years, we'll likely see the long bond near 2% (and the 10-year near 1%), just as in the 1930's. But in the meantime, I'll trade the 2.75%-4% range.
The Baltic Dry is one of Warren Buffet's favorite leading indicators. As of today, it's in the triple digits (989) and is down almost 60% from its high of 2337 on December 12th of last year. It's down almost 40% just in the last month. To put it in context, this is one of the biggest drops for a new year in almost 30 years.
The long bond probably has another 50-60 basis point drop left in it. When the yield on the 30-year dips below 3% (like last year), that will be the time to start nibbling at TBT.
I don’t understand your fixation on just the current yield of TLT. The only thing that matters is one’s overall return: current yield + capital gain (or loss, as the case may be). So far this year, TLT is up about 9%, while the S&P 500 is down almost 2%. I happen to think we’ll see another 50-60 basis point drop in the long bond’s yield this year, providing another 10-12% capital gain. My total expected return, based on when I bought my bonds last year, is around 22%. If the yield on the long bond drops much below 3%, I’ll likely sell (unless it looks like the world’s economy is headed for a true deflationary collapse). And if it approaches 4% again, I’ll be a buyer.
Uh-oh, the 10-yr crossed that 2.64% threshold, and is now down to 2.63%. Nobody could have foreseen this drop in interest rates, nobody! LOL
Hello ariel, and welcome for your quarterly visit. I remember you being bullish on bonds (as was I) back in January. So far the right position, and I think it continues. Bond yields tend to peak in the early part of the year when optimism about the economy flourishes, and then fall when economic reality hits everyone in the face. This pattern has played out for most of the past 15 years. I invest in long-term bonds when people are optimistic about the "recovery" (and rates are high), and then sell when maximum pessimism about the economy sets in (and rates are low). Does that make me a trader or investor?
Why do they call it a "death cross" when it's actually a "golden-cross" chart pattern for bond prices themselves? At any rate, with the recent "death cross" (50DMA crossing below the 200DMA) for bond yields, Bank of America Merrill Lynch is warning that a break of 2.64% in the 10Y yield could open the door for a drop to 2.39%. TLT, of course, has experienced a "golden-cross", with the 50DMA crossing the 200DMA about a month ago. In fact, the 100DMA is about to cross the 200DMA for TLT. What is that called? I just call it "BULLISH"!
I don't understand your question, "Will triple net rents experience the benefits of rising rents...?" Why wouldn't they? Because the leases in single tenant buildings tend to be longer term? That might slow down rent increases compared to multi-tenant properties, but they can still increase them as leases expire. And that same dynamic protects the rents in a recession when market rates are dropping.
The Baltic Dry is now at 1061, the lowest level since August of last year. But, I thought the slow first quarter was all due to the weather and things were going to rebound this quarter? LOL
As for the VIPSX, I owned an inflation-protected bond fund (TIP) from early 2010 until early last year and it did quite well when everyone (including myself) was expecting higher inflation. But I sold it when I became convinced that disinflation or even deflation were likelier (it's harder to create inflation than most people think). Since that time TIP has dropped about 10%. With CPI trending downward (averaging around 1.25% YoY for the past 6 months), it's hard to see the upside of an inflation-protected bond fund at the moment.
As for the GNMA fund, I don't know enough about it. I got burned years ago, though, investing in a fund like that. If interest rates happened to rise, you get hit from the decline in value. If rates happen to fall, you're subject to prepayment risk. Maybe in a low-rate environment such as this, that's not as much of a risk.
I'm always intrigued by your strategies, chip, so explain yourself. TLT at $113 would result in TBT much lower than $65 (I mean, it's almost there already right?). So what is your thesis as to how the rest of the year plays out?
I think even the most die-hard FNMA investor would agree that this is a very speculative stock (so much relies on the unpredictable actions of the government and court system). If one is going to make speculative stock bets, you have to commit to making a number of them in fairly equal increments. Like a venture capital investor, most will not work out, but the few that do should (hopefully) provide out-sized gains. It's a numbers game, though, and you have to make many of these bets to diversify yourself. If your plan is to put all of your speculative money into just one stock, then you will have made a very foolish wager.
TLT was up 7.1% for the first quarter of 2014, while the S&P 500 was up only 1.3%. It's only one quarter, but still interesting because it's precisely the opposite result that most "analysts" and CNBC talking heads were predicting. A basket of 30-year bonds would have been up 8.3% in the first quarter.
Your original topic was not just interest return vs. inflation. You asked the question: “Why would anyone would put 30 year money at under 4%?” And the answer is: Because a drop in interest rates will provide a much greater return than just 4% when you figure in capital appreciation. If my investment thesis proves correct, that interest rates still have further to fall, my total return will likely be in the 22-25% range (based on the price I purchased my bonds last year). I’ll sell them at that point. And when people become optimistic about the economy and rates rise once again, I’ll buy them back. Rinse and repeat for the next decade.