Simply explosive action in bonds this November with the Bloomberg U S Aggregate Bond Index (AGG) seeing its best performance since May 1985. Digging deeper the rally was led by long duration with several funds in the Morningstar Long Government category seeing returns in the 14% to 15% range. My favorite category - Municipals - didn’t disappoint with returns in the long investment grade muni category exceeding 10% for some funds and outpacing the high yield munis category which saw returns in the 8% and 9% range. Other categories such as emerging market debt and corporate bonds saw smaller yet still out of the ordinary price gains. Funds that were concentrated in mortgage backed securities also shined. Surprisingly junk corporates lagged a bit with the Morningstar average coming in at *only* 3,99%. As expected with a rally based on expectations for lower long and short term rates the bank loan category pulled up the rear.
Prior to the explosive action in and around the November 1 Fed meeting, many bond investors and traders were camped out in some obscure but tightly trending bond funds such as EMPIX and CBYYX which were on pace for double digit returns. ( Someone at MFO needs to write an article about these co insurance bond funds) But their returns in November paled in comparison to most everything else in Bondville.
Below is where I begin to repeat myself - a trait I abhor so will put myself on a three month moderation (hiatus) after this thread runs its course.
As a trader or for that matter an investor, you have to believe that every rally is THE rally and play it as such. That way you never miss out when it actually is THE rally. Obviously so far the rally around the fireworks in and around November 1 has been THE rally. Seasonality is kicking in for municipal and junk corporates so we shall see if the rally has staying power. So much depends on the action in the 10 year Treasury. January of this year saw an impressive rally (albeit nowhere close to the current one) only to fade to nothing when the 10 year begin to lose ground again and the swoon in regional bank stocks.
My first bond trade ever was in January 1991 in junk bonds and as luck would have it ( and I am a big believer in the luck factor) it was a lock out trade. A lock out trade is when the market relentlessly rises day after day locking out those looking for some type of minor correction to enter. Shortly after my January entry in 1991 in junk bonds there was a period of 60 consecutive trading days with no down days. Somewhat akin to what is occurring now in municipal bond funds now with only one down day in November. Not a whole unlike what occurred in muni funds in January 2014 and which is detailed during that period in the archives here under my moniker. Lock out trades are rare and bullish going forward.
Now this humongous rally in bonds may be much ado about nothing and burn up in flames. That is where prudent money management comes into play and not allowing hard earned gains to evaporate into losses, But those waiting for certainty, the coast to clear, or for better times ahead will always be destined to be late to the party. Feeling comfortable is not a positive trait if you are a trader or investor, Risk is part of the game and many of the best trades and investments arise when we are the most uncomfortable.
I am sure I will get blowback on some of the above but to blunt that let me say I completely understand the current mindset of being safely tucked away in money markets and CDs earning over 5%.
Comments
PRCPX in Nov. + 4.55%
TUHYX in Nov. +4.00%.
You're making too much sense! No arguments here.
- ”I sold all of my bond funds in March of 2022. I have not bought any new bond funds since then, preferring Brokerage noncallable CDs and MMs. I have no plans on buying any new bond funds in the near future.”
- “+100”
- ”I’m with you.”
- ”So while bond fund investors over the next 5 years will be putting in time and effort trying to get their 4%-5% TRs, I'll be putting on a slew of golf courses, knowing that we have a 5+-yr CD ladder in place of those bond funds that is paying in excess of 5%.”
- “I look at MMs paying around 5%, CDs paying around 5.3%, and there is little to no risk there. As a retired person, I am fine with collecting 5+% for now.”
- ”As a retired person I am right with you! I am sleeping very well with little to no risk and I have NO FOMO”
- “Just bought two 12-months CDs from two large national banks with a quite satisfactory yield of 5.30%. I am not concerned about eking out a few extra basis points here or there in the future.”
Great. Maybe LT bond holders will continue to see massive upswings to continue to recoup their heavy losses over the past years. (Maybe not?) To wit, the vast majority of taxable bonds do NOT have 5-yr TRs equaling 5% yet.
And we'll see how long the bond party lasts, eh? Talk to me in 5 years after our CP CD ladder made us 5+% annually for that period, risk and worry free, allowing me to spend my investment time on stocks, where real money is made. To wit, with all of our stock funds UP 20%-65% this year, except one only UP ~9%, I really don't give a rat's arse what bond funds are doing. I don't want to and I don't have to! My FI money is instead parked in the 5+% CP rate lot where I don't have to waste otherwise quality investment time on it for years to come.
Take a deep breathe & relax, Derf
Above link from the respected Randall Forsyth at Barron’s. Feels much of the allure of bonds has dissipated with the recent rally. Mortgage backed securities bond funds still offer value as do closed end bond funds which are still trading at some of their cheapest value in years. Noticed today PIMIX outperformed munis and junk primarily because of its outsized exposure to MBS bonds.
My understanding of these funds is rather limited, but one can find lots of related information at https://www.artemis.bm, see also https://en.wikipedia.org/wiki/Catastrophe_bond and https://www.chicagofed.org/publications/chicago-fed-letter/2018/405#:~:text=a catastrophe bond.-,A CAT bond is a security that pays the issuer,(on%20the%20Richter%20scale).
The basic idea is that there is a growing number of catastrophic events now, such as hurricanes, earthquakes, forest fires, and cyberattacks. When the scale of such events goes beyond some limit, the insurance companies may fail. CAT bonds are issued to provide a secondary layer of protection. Because of the risks involved, the yields are high.
There are only two such funds in the USA, EMPIX and CBYYX, but there are many closely related UCITS catastrophe bond funds outside of the USA. They have a similarly impressive performance this year, see https://www.artemis.bm/catastrophe-bond-fund-indices/
However, during the last month, these funds have been slowing down. Today is the first day when both of these funds have lost about 0.1%. Thus, the seductive figures showing these funds' beautiful performance in 2023 might be misleading. But one aspect of these funds makes them interesting regardless of their recent performance: The magnitude of the catastrophic events is almost entirely uncorrelated with the stock market, so these bonds may provide significant diversification benefits. Thus, as Junkster said, it would be great if somebody at MFO commented on it or wrote an article about CAT bonds.
https://www.morningstar.com/funds/xnas/shrix/quote
The outstanding behavior of CAT funds is not something one may count on going forward. One of the reasons for their outperformance is that they are also floating rate, and this is the year they shine (or shined). The second reason is that a large part of their return is due to hurricane-related insurance, and this year, we were lucky that the related losses were less than expected. In addition, the risk premium is high, and it may continue to grow.
The performance of the CAT bonds since 2011 can be found here:
https://www.artemis.bm/catastrophe-bond-fund-indices/
Also other interest rate sensitive sectors such as financial and REITs are moving up nicely. It is encouraging to see the market starts to broaden out beyond the large tech stocks.
As a separate but related matter, call protection (or the lack of) is more often discussed in the context of CDs. But the feature also applies to Notes and Bonds. If interest rates on Notes and bonds keep going down or even stabilize at current level (I.e., low volatility), one can expect a lot of issues called. When these issues currently trading at a premium get called at par (or stated maturity price) there will be losses. One hopes that your manager has done diligence before buying and continuing to hold the issues in your fund.
@Junkster is a zen master!
FWIW, one common strategy by "income funds" is to buy premium bonds to boost the current income. But this is at the expense of declining value to par.
The "total return" funds may buy discount bonds to bet on capital appreciation to par, but the current income is low.
Both are valid strategies for proper bond funds.
There were 2 other great funds I found and I have played with 2 out of 3.
There is no fun in posting about bonds, trades, and what I see anymore because of several posters as I have done for years. For more see (link).
Example from 2020 (https://www.mutualfundobserver.com/discuss/discussion/55299/bond-mutual-funds-analysis-act-2/p2). You can see when I sold and bought.
Never in my life, have I bought CDs or treasuries because trading bond funds is a lot better and this year it was great too.
BTW, trading HY munis funds since 2022 made me a lot of money. I also explained how I did it (hint: a simple T/A is one of my major signals).
As usual, a trader always sits by the exit because market conditions keep changing.
For the benefit of the readers,
I think the premium bonds mentioned in your post are those issued at a premium and thus issued with coupons higher than prevailing interest rates. The bonds currently trading a premium mentioned in my post are referring to bonds that moved to premium (over stated maturity price) because of decrease in interest rates since the issue date.
For sure I am no expert but isn't that what kind of triggered this rally...when Yellin didn't issue as much long term debt (QRA announcement) in early November...and maybe when Ackman was talking his book? Are there still concerns about the supply/demand mismatch or is that behind us?
Just seems to me that many investors see the rates come down and believe we are in the clear so to speak when maybe there is something more to it and more caution is warranted?
I'd appreciate it if you could break down these issues in more simpler terms and both what could go right and could go wrong regarding potential impacts for investors looking forward several months
Best Regards,
Baseball Fan
People like Bill Gross have been VERY right this year, after having lost all public credibility last decade. I cannot trust someone who is going to play loud music at 2 am to piss off their neighbor. He lost me at hello
Ultimately we do know trading around is not bet helpful. I think it was @ybb who very wisely pointed out to me that the 5 year maturity captured a lot of the bond market return without a lot of its volatility.
That still seems thoughtful.
I am impressed with @junkster and a few others who shrewdly bought the low in bonds and I know some commentators who did the same in stocks. It’s very exciting when it falls in place and works.
serious loser of an investment for 2y now, amazing
thinking cat bonds are going to be the future
Another surprise is that the dollar-hedged BNDX and global bond funds are way ahead of BND this year.
Edits. I went back to read @davidsherman’ “No Fat Pitches” as a reality check. Thus I move slow and incrementally.
Up 2% the last month, almost. More woohoo.
Examples
PIMIX made 8-10% for several years with low SD.
IOFIX fell 45% in 03/2020, but after that it exploded 40-50%.
Cat bonds did not make much in previous years but did well in 2023 with a very low SD.
HY munis made several times 3+% during 2022-23 and much more in Nov 2023.
Woohoo.
“… most here”? Doubtful. But cash certainly was front and center on the board much of the first half of ‘23. Wish it were possible to pull up individual pages of discussions to try and quantify the percentage of comments devoted to cash investments / ST treasuries / CDs etc. early in the year. A guess would be 25-35% some days.
Bonds of most colors (sovereign, corporate investment grade, junk) have had a great run the past 2-3 months. Don’t overlook much disparaged equities.
YTD (Bloomberg)
Dow +10.36%
S&P + 21.07%
NASDAQ +38.94%
(Now - Watch Chair Powell scare hell out of the markets later today and make an idiot out of me.)