Is the stock market going to tank?
Quote:
Originally Posted by
ghosthop
Do any of you want to school me on the bond market?
I have read enough of the basic idea that because rates have gone up, the price of bonds have gone done over the past 18 months.
If I assume that the fed keeps rates where they’re at currently through next summer and continues to sell its holdings/treasuries stay cheap because of fear of default, are there any conclusions that can be drawn? Is there a good introductory text that I should seek? I am happy to work through the jargon.
If you’re still interested in passing knowledge on, would anyone like to explain their expectations for bond indices over the next six months?
I wouldn’t expect the Fed to still be where they are at next year, if inflation remains persistent, it could be higher.
Not our base case but that’s what the Fed has communicated.
Market is pricing in 50bps of cuts next year (second half) which is base case- inflation trickles lower, unemployment close to 4%, Fed just wants to start moving off a pretty high number (for recent history).
If shit starts to get ugly, Fed could start cutting at 50/75 a clip.
If these high rates start to hit businesses, consumer spending, credit card rates start to deter demand, student loan repayment hits spending, household savings has already been depleted….
Businesses themselves are flush with cash(paying 5%). The debt they have is largely at low rates (termed out in 2020/2021). If a consumer-driven slowdown starts to hit profits (spoiler alert it has outside of big tech and energy), businesses have another lever they don’t want to pull. And to this point they haven’t. Labor.
If it gets bad enough businesses have to start cutting workers, it will go downhill fast.
That said, right now cash or short term IG are paying 5-6%. Not bad!
High yield: 9+% yields for companies with ~400bps of spread? That’s not really “tight” but it’s close to average. So you’re getting 9% for bond index price close to $85. Not a ton of downside, even if defaults go to 2.5%. Recovery close to 60.
Rates- right now…well over the past 3-4-5weeks…yields have gone up as growth/inflation metrics have been on the higher side. Ok pretty easy relationship there. But yields and real yields have actually popped to the point of 2.5-3% growth. Trend (long long term) has been 2%. 3% growth??? I’m taking the under in 1 year. I’ll take under 2%.
The Supply thing is something to watch but I’d counter- how much did Treasury issue during and after the GFC? And how did that impact bonds? The 10y was under 2% for much of that decade. People will buy it.
In the end I’m sprinkling some broad high yield. I’m sprinkling some more 5-10y Tsy. And I’m buying short term gov and corporates.
Is the stock market going to tank?
10y rate was 100bp lower 4 months ago with basically the same Funds rate. Fed does not set the long end rate, they can only influence it. The timing of the sell off looks to be in line with the QRA refunding announcement. Supply has never been a long term factor. Could it be now? Of course..or, maybe not. Too early to tell.
I was listening to Rieder a couple months ago and he was saying there are technical factors that could cause long rates to go up for the next few months (which is now) but expects them to fall back next year.
As we’ve said before, the Fed never sells anything. They are not reinvesting proceeds and the roll off will continue to increase with maturity. So even though QT will likely increase it is not an additional drag from the Fed if they simply aren’t buying anything.
Bonds are pretty simple. Ask away.
Another point about the selfish boomers. These higher bond rates are manna from heaven. They are getting higher income which is one of the reasons consumer spending is above consensus. So, the selfish boomers have had the best of both worlds. Fat 401k’s from a 40 year bull market that they can roll into safe 5% yields.
One other point that I think is influencing rates right now is spread trading. Any managed bond fund has a bias toward the yield curve. The 2/10 yield curve has moved 100 bp in six months. That’s a lot! Rates can be affected by the trillions in managed funds changing or covering yield spread positions. This is bet on curve steepening for example:
Stan Druckenmiller on bonds:
“I am currently short bonds and long the front end”
