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Investing General Discussion
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Guest, it's time once again for the massively important and exciting FoH Asshat Tournament!
Go here and give us your nominations!Who's been the biggest Asshat in the last year? Give us your worst ones!
Big Phoenix
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Sanrith Descartes
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Those numbers are across the board terrible. Now the profit numbers I understand due to price cuts across the board. All the rest? Fuck. Maybe there is truth that he is spending so much time at Twitter that he is letting Tesla suffer.
Ps.. it nosedived after 6pm
Lost another 4% AH.
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Sanrith Descartes
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Gonna try this as a readers digest version. "Normally" longer duration equals higher rate. But we are currently in this thing called inversion. Lower time frames are yielding higher.
The answer to your question is if you believe that rates are going back down, you lock in the 5% for 30 years because those 3 months hit maturity and if rates are heading back down you can't get that 5% at 30 years anymore.
Now this doesn't happen overnight. Cycling 3 and 6 month notes is solid right now. But when you see a 20 or 30 hitting a yield you like, you swap and lock in that rate for your lifetime (or close to it).
People who bought 30's yielding close to 7 % in the 90's were still making close to 7% when interest rates were zero.
5% today may not look great with inflation, but assuming inflation gets back under control, 5% with zero risk with inflation under 2% has a place in some portfolios. Those 20 and 30's need viewed with a long duration set of glasses.
Jysin
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To quickly add on this, inversions happen early in these cycles as most just think the economic turbulence is short lived. It takes much longer for the long durations to catch up. The Fed has been repeating itself for months now about “higher for longer”. Investors are finally taking that on board.
Once the Fed hints that hikes are done, you will likely see rates plunge as some investors seek to lock in the peak rate. In the meantime, it’s like catching a falling knife guessing when rates will pause and finish. I’ve been layering into TLT slowly and I’m looking at a -6% on the core. I can’t fathom how underwater the banks and pension funds are on these positions. (Paper losses). I started buying in when rates were above 4%. Those banks were buying 1% and lower. Must be >50% paper losses.
This is the banking risks. People take out too much cash at once and the bank needs to raise cash, they do this by selling their treasury holdings. The problem is, no one will pay face value because who is going to buy a 1% bond when you can buy a new one from the Fed today for 5%? So they have to sell at a discount and those paper losses get realized. Suddenly you’re insolvent like SVB and FRC back in March.
As rates continue higher, more banks become at risk. This is the “systemic risk” the Fed is occasionally mentioning.
Once the Fed hints that hikes are done, you will likely see rates plunge as some investors seek to lock in the peak rate. In the meantime, it’s like catching a falling knife guessing when rates will pause and finish. I’ve been layering into TLT slowly and I’m looking at a -6% on the core. I can’t fathom how underwater the banks and pension funds are on these positions. (Paper losses). I started buying in when rates were above 4%. Those banks were buying 1% and lower. Must be >50% paper losses.
This is the banking risks. People take out too much cash at once and the bank needs to raise cash, they do this by selling their treasury holdings. The problem is, no one will pay face value because who is going to buy a 1% bond when you can buy a new one from the Fed today for 5%? So they have to sell at a discount and those paper losses get realized. Suddenly you’re insolvent like SVB and FRC back in March.
As rates continue higher, more banks become at risk. This is the “systemic risk” the Fed is occasionally mentioning.
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Big Phoenix
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Jysin
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This is also why dividend paying names get crushed in high rate environments. Who wants to own something like T or KO when you have underlying stock price volatility in order to get your 3-6% div yield? Stock price can dive and you’ve got to claw your way back to break even. Why not just lock in 5+% long duration and forget about it?
We start seeing 6%, 7% Fed rates as some have warned and there will be a lot more breakage in the system.
Equities need to pay a premium to bonds to attract investors. You start getting more companies revising down and missing, they start looking less attractive vs the risk free rate.
We start seeing 6%, 7% Fed rates as some have warned and there will be a lot more breakage in the system.
Equities need to pay a premium to bonds to attract investors. You start getting more companies revising down and missing, they start looking less attractive vs the risk free rate.
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taebin
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That makes sense. Less research on my part, but I didn't realize you could trade in a long term bond if the current rate drops below the rate of purchase. My line of thinking was why tie up a sizable amount of assets at 5% for a very long period, when we could potentially stabilize and rebound in 12 months and that investment would make a lot more sense in SPY at 10%. As usual, the answer is in risk aversion and time horizon.
If that's the case, I guess this presents as a mechanism to lock in at 5% guaranteed, with the ability to bail at any time? Do you pay a premium or fixed percent for this ability to bail? Almost like an option where it starts moving against you OTM, you have the ability to buy it out?
If that's the case, I guess this presents as a mechanism to lock in at 5% guaranteed, with the ability to bail at any time? Do you pay a premium or fixed percent for this ability to bail? Almost like an option where it starts moving against you OTM, you have the ability to buy it out?
Jysin
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You also get underlying cost rise in something like TLT 20yr bond etf. Hence my layering in as I believe we are closer to terminal rate. (My guess, not advice). As soon as something breaks and Fed is forced to make a cut, TLT should appreciate by a fair margin. If you outright own an actual treasury bond, if you wanted to ever sell it, you can now do so at a premium. Opposite to what’s happened over the last year.
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Sanrith Descartes
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If you go look for my recents posts on bonds here, you will some examples of how this works. The way to adjust for yields on a bond is by trading it at above/below par value (face value). So if you have a $10k par value bond yielding a 2 coupon, no one would buy it for $10k. But, you can sell it for say $9600 and the buyer is now getting a comparable yield to a brand new bond.
Note: that $9600 price is just an example, I'm too lazy ATM to do the math on what price would yield 5% to the buyer.
Edit: and yes, you can buy/sell bonds like like you can buy stocks. The mechanism is a tiny bit different, but a bond is just a debt instrument. They are bought and sold constantly on the secondary bond markets.
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Sanrith Descartes
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SPY sitting with at the 20-DMA support line. It has bounced off it the last 4 visits. Lets see if it can make it 5. If not, I expect a continued slide of about 2% down to the support of the 200-DMA.
Sanrith Descartes
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This will be an epic squeeze when it finally reverses...
ps.. how fucked is the bond market right now? TLT at 2007 lows.
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Sanrith Descartes
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Jysin
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If this bounce sticks, could be a great scoop. TLT already trading highs of day.
DXY, Yields, and VIX all falling. Maybe a day for a market bounce. Need Powell to wear his dovish tie today!
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Sanrith Descartes
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My main reason was this price hit exactly at a 4% dividend yield. I was banking on bigger money than myself thinking the same thing.
Sanrith Descartes
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Its floating just above the 200-DMA which would normally get my interest up, but its TSLA and its previous run up made things like those DMAs less valuable. I still remember adding to it at $125 earlier this year. Its hard for me to buy it here after those earnings.
Sanrith Descartes
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T up 7% so far today after an earnings beat!
I don't know which gif to post: Nelson laugh or Sigh of relief
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Big Phoenix
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