https://www.cnbc.com/2024/09/16/blackrocks-rick-rieder-says-a-golden-age-for-fixed-income-begins-this-week-with-the-fed-rate-cut.htmlFrom last Monday. “ Take advantage of this golden age for fixed income….and buy yield and just watch it do its thing”. He likes securitized products, high yield, and European credit, Breaking that down further agency residential mortgages, and CLOs. Especially investment rated CLOs which he believes are a bargain. I have always thought Mr Rider the CIO of BlackRock’s Global Fixed Income division and responsible for 2.4 trillion in assets had more of a clue that most other so called bond gurus.
On a related note re bonds. A case could be made that the real golden age for bonds began last year in 2023. We had double digit gains throughout various categories ala high yield, bank loans, catastrophe bonds, emerging markets debt, and BBB CLOs as well as many specific funds in the non traditional and multi bond sectors. The bond hybrid categories of convertibles and preferred also saw several funds churning out double digit returns.
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https://www.janushenderson.com/corporate/article/do-aaa-clos-still-make-sense-in-a-declining-rate-environment/#:~:text=However, when rates start to,rates hypothetically go to zero.
Also don’t confuse the floating rate bonds in CLOs with the floating rate bank loan funds. Everything floating rate related in Bondland has held up well so far after the rate cuts. The BBB CLOs would be susceptible to recession fears. Lastly check out the chart below of investment grade CLO PAAA. Talk about picture perfect.
https://stockcharts.com/freecharts/perf.php?PAAA
Thanks for the info!
Juan de la HOZ has been discussing CLOZ and explaining it in simple language since 8/2023. See (https://seekingalpha.com/article/4627176-cloz-bbb-bb-clo-etf-strong-10-7-percent-sec-yield-low-interest-rate-risk).
He published another article in March 2024 (https://seekingalpha.com/article/4677263-cloz-high-yield-clo-debt-etf-strong-9-6-percent-outstanding-performance).
Another one is JBBB VS CLOZ (https://seekingalpha.com/article/4689549-jbbb-versus-cloz-which-high-yield-clo-etf-is-best-for-income-investors)
Sorry if you can't read it.
I generally do not read SA articles but gave it a shot with the last article in FD’s post. A good article and expanded on the info I mentioned above and is a well balanced article. One thing this article emphasized worth noting is that though the default losses for CLOs relative to senior loans is lower, the volatility for CLOs is higher. I have to contemplate why the CLO structure makes default losses lower at the same credit rating but from experience I have to agree with the volatility statement made by the article. It is possible the rating agencies underrate CLOs. Thanks @FD1000.
One of the things that stood out he said was "There is excessive crowding in the markets these days." I think this does not get enough attention and @Junkster too emphasized this a few times.
OTOH, what happened to all that money sitting in CD's etc.?
Flows into m-mkt funds have slowed since September.
Where is money going?
BONDS - taxable bonds & muni bonds.
This is from Barron's Cash Track that shows weekly flows.
We have been hearing about the big tech companies crowded trade for about 15 years.
Do I really want to be in the unloved/uncrowded ones that are lagging?
And that's why I jump on the new leaders, and many times they lead for months and years.
There is only one undeniable indicator: the price, and why I watch for uptrends. Never predict and never front run.
Remember: in early 2024 many predicted 6-7 rate cuts and SP500 to finish at about 4900. Both were wrong so far.
BTW, for all the self referential folks in this forum, Rick Rieder was not talking about crowded mutual fund trades. Listen to his clip if you want to know what he is thinking.
Inflow was going high from early July to mid July. From mid July to mid Aug is was an outflow.
Now, look at a 4 months chart of BND(https://schrts.co/EdAKFnRT). In the first period, BND was up about 2%. In the second period, it was up more than 2%.
Second test, BND is the US tot bond index, which is held by millions. THOPX is an unknown fund. What do you think matters more during the first 6 months of 2024? the amount of flow or the performance? See the chart(https://schrts.co/QxETIhez).
To be more specific I also found the following (link) "February 2024 was a big month for Fixed Income funds"
Look at the first 6 months chart of BND, do you see how BND did later? I'm sure BND got more flows than THOPX.
Rieder has a good reputation and talks a good game. “Bubbly” with enthusiasm for bonds whenever he appeared on Bloomberg the past 12-18 months. For some stability (not looking to make a lot) I sent a chunk to a Gundlach investment grade bond etf last week. Never invested with him. Was very impressed by an hour long interview a few months ago - his intelligence & his read on the longer term macro. I posted the video here. But got the sense from lack of board interest Mr. G may have fallen out of favor.
Thanks for the great thread @Junkster
Memo To Treasury Market Investors: Chill!
Okay, I am getting inundated enough now regarding the sloppy behavior by the Treasury market since the Fed cut rates -50 basis points last week that it deserves a response. A little bit of history is in order.
When the Fed cut rates -50 basis points at the onset of the easing cycle that commenced on September 18th, 2007 (from 5.25% to 4.75%), the 10-year T-note yield actually popped the next day to 4.55% from 4.47%. That is because investors bought into the view that the rate cut was better for the equity market than it was for the bond market because, like now, there were visions of rate cuts being coupled with a “no landing” economic scenario. By October 12th that year, the 10-year T-note rate had risen to 4.70% for a +20-basis point increase in the 10-year T-note and my phone was ringing off the hook: “WTF is going on?” I preached patience then as I do now. At the lows, the 10-year T-note yield hit 2.08%.
The same thing happened on January 3rd, 2001, when the Greenspan Fed cut -50 basis points in a surprise intermeeting move, and the 10-year T-note yield spiked to 5.14% that very day from 4.92% the day before as fund flows went straight into the stock market, and for the very same reason cited above. Because nobody had a recession in their sights, the 10-year T-note yield was sitting at 5.4% by the end of May 2001 — up nearly +50 basis points from the point right before the Fed had engaged in that jumbo cut. Where did the yield bottom? Try 3.13%. Nothing moves in a straight line, is all, and the reality is that bonds typically do rally in Fed easing cycles, short or long, and whether or not a recession ensues.
What about that -50-basis point rate cut on February 1st, 1991? That followed nearly a dozen -25 basis point moves, and that day, the 10-year T-note yield closed at 7.91% — only to then rise to 8.25% by March 19th and then to 8.36% by July 9th. But what a buying opportunity it proved to be because the fundamental low was 5.19%.
Go back to the first jumbo cut of -50 basis points on October 11th, 1984 (after a pair of -25 basis point cuts) and the 10-year T-note yield again refused to rally initially — it was 12.31% that day, and days later, it was sitting at 12.32% — and yet, the low was 7% and this did not even require a recession. Just sustained disinflation.
So, stay the course and stop freaking out over daily or weekly gyrations. History shows that equity investors rejoice more than bond investors do to the initial jumbo rate cut. But the early “sell the fact” that engulfs the bond market proves to be a very attractive buying opportunity because in disinflation cycles, when the Fed is easing, with or without a classic recession, the trough in Treasury yields is down the road. And history shows that, on average, the decline in the 10-year T-note yield from the start of the first jumbo cut to the low is closer to -300 basis points. That would put sub-2% in sight for the 10-year T-note, as an aside.
Oh - The rise in longer term rates makes perfect sense to me. Funny that all the talking heads on Bloomberg were shaking their heads over it in disbelief for several days. (I think their script writers have it correct now.) Stimulate at the short end by cutting rates and long bond investors worry about higher inflation down the road. So the market demands a higher rate of return farther out on the curve. May not last, however. If markets begin to sense the Fed is late to the game and a hard landing / recession is in store (implying lower future inflation), then longer term rates would probably fall. Who knows? You can get views all over the place on that point.
You nailed it. I just concentrate how to make money now
I was a bit surprised by the differences in worst Quarter vs best Quarter relative to the same IG corp credit. As the article says, do not put your short term cash needs into this fund. So, I was wrong in using JAAA as a cash substitute!
Different readers, different takeaways. What I read seemed to say the opposite, viz. that AAA CLO funds could serve as a cash substitute: You may be focusing on the "long term" above. That doesn't rule out reliable shorter term performance. Perhaps it is worth examining what one expects out of a cash substitute. If it's absolute stability, then no bond funds will do. Otherwise, the field is open.
Before the GFC, there were a bevy of what are broadly termed "enhanced cash" funds. They took tiny steps out from MMFs along the duration spectrum. iMoneyNet has a taxonomy I still like:
- Cash Plus: <180 day duration, includes some LT &ge:A-; good for investing 3-6 months
- Enhanced Cash: 0.5-1 year duration, includes some LT ≥BBB; expect to hold at least 6 months;
- Ultrashort: 0.5-2 year duration, includes some LT LT ≥BBB; expect to hold at least 6 months;
2006 piece on enhanced cash funds from Barclay'sAAA CLOs seem to fall somewhere in the Cash Plus to Enhanced Cash range. If you're expecting to draw large amounts of cash within, say, a month, this is not for you. But then neither is a six month CD.
I find I'm thinking about these AAA CLOs the way one should have thought about Strong Advantage (STADX) when it was still a Strong fund (1990s - 2005). Something that one could use to hold cash, but not short term cash. Here's how its 2001 prospectus read: Not exactly what one would look for in a cash-ish fund. Yet it outperformed MMFs in 8 of the 10 years between 1991 and 2000, by as much as 5.4% and never underperformed by more than 0.5% (all from prospectus).
In the early 2000s its risks became apparent, as it underperformed its peers by 1-2% in 2002 and even lost 0.73% in 1Q2002. But it still made 0.83% for the year. The point is that funds that are not good for day-to-day cash can still be good for cash investments. (FYI: Strong Advantage was renamed Strong Ultra-Short in this period.)
Talk about picture perfect. https://stockcharts.com/freecharts/perf.php?PAAA
@Junkster is being a little selective here. As this PGIM piece says in its title, Not All CLO ETFs are created equal. PGIM says that its fund holds all AAA tranche CLOs, while others may not. M* does show JAAA holding some AAs, which adds volatility. That's okay, it's not much (PV, over PAAA's short life gives 0.5 volatility vs. 0.6 for JAAA.)
If I remember correctly … Strong nearly “broke the buck” on one of their money market funds back then too. I recall the ol’ man (Dick Strong) bailed it out with the firm’s assets.
Yes - our own definition of “cash” as a part of our investment portfolio may vary depending on need & risk tolerance.