Yield curve getting flatter, and flatter

[copyright1997reloaded]

Quote:

Originally Posted by brewer12345 If this is a typical rebalancing type portfolio, I would stick to high grade instruments (IG corporates, treasuries, agencies and CDs) and probably look for durations between 4 to 7 years. You want this part of the portfolio to hold up or appreciate if equities drop so that you can rebalance at an opportune time. I often hold a mix of funds (easily traded to rebalance) and individual bonds/CDs (not as easily traded, most likely held to maturity). I like the iShares target maturity funds, as I am not fond of negative convexity in my bond allocation. Just bought some IBDO to extend duration from some very short stuff.

Brewer, I always appreciate your knowledge of debt instruments. One of the things I've done (for better or worse) over the last five years is to substantially reduce my non CD, non-inflation adjusted fixed instrument holdings...simply because rates had become so low I just couldn't make myself own a lot of long term fixed paying 'low' amounts.

Just curious here: What would you think your average duration is at this point?

[SecondCor521]

Quote:

Originally Posted by NW-Bound The market peaked strongly the last few times the yield curve flattened, then inverted. Then, all hell broke loose a bit more than 1 year later. I think much has been talked about this, including on this forum. Somehow, people do not believe in this. You would think everyone would be selling, but perhaps people are hanging on for a few percent more.

I have heard, probably from CNBC when the yield curve was under discussion in November or so, that:

1. The yield curve flattening does not always result in a market pullback.

2. Even when the yield curve flattens and the market pulls back, the pull back is 12 to 18 months after the flattening happens.

3. During that 12 to 18 month delay, the market typically goes up another 10-20%.

And some of us are just lazy LTBH index types who have set-it-and-forget-it AAs.

ETA: Looks like copyright1997reloaded said essentially the same thing already.

[NW-Bound]

With the Efficient-Market Hypothesis, one would think that people would be selling in droves some months after the yield curve inversion.

Perhaps, they did. But I did not.

[OldShooter]

Quote:

Originally Posted by NW-Bound With the Efficient-Market Hypothesis, one would think that people would be selling in droves some months after the yield curve inversion. ...

Or that the market consensus is that this is no big deal.

I am not aware of any statistically significant financial results that support the thesis that technical analysis is effective. This includes yield curves, CAPE gyrations, plus head-and-shoulders, resistance levels, support levels, and all the other technician arcana.

Different subject: I am surprised that with all the agonizing over long bonds no one has mentioned TIPS. These basically take all the risk out of the equation and yield a little bit of real interest to boot. They really have no yield curve except in the rear view mirror.

[NW-Bound]

I would say that talks about the yield curve, unemployment, interest rate, inflation, trade imbalance, etc... are more fundamental than technical.

When people talk about the dot-com mania, the housing and mortgage mania, and recently the bitcoin mania, they also talk fundamental, not technical.

PS. If one truly believes in EMH, he will get some bitcoins as they are just another "asset" to diversify into.

[copyright1997reloaded]

Quote:

Originally Posted by OldShooter Or that the market consensus is that this is no big deal. I am not aware of any statistically significant financial results that support the thesis that technical analysis is effective. This includes yield curves, CAPE gyrations, plus head-and-shoulders, resistance levels, support levels, and all the other technician arcana. Different subject: I am surprised that with all the agonizing over long bonds no one has mentioned TIPS. These basically take all the risk out of the equation and yield a little bit of real interest to boot. They really have no yield curve except in the rear view mirror.

I just mentioned (in passing) TIPS in my post/question to Brewer. Essentially all of my fixed allocation is either in relatively short term savings/CD's or in TIPS. I did this for the reasons you mention, but who knows if this is the best long term approach. I just can't see myself doing long-term corporate bonds when the 30-year AAA rate is around 3.84%.

[brewer12345]

Quote:

Originally Posted by copyright1997reloaded Brewer, I always appreciate your knowledge of debt instruments. One of the things I've done (for better or worse) over the last five years is to substantially reduce my non CD, non-inflation adjusted fixed instrument holdings...simply because rates had become so low I just couldn't make myself own a lot of long term fixed paying 'low' amounts. Just curious here: What would you think your average duration is at this point?

In my 401k where I have few choices, it is whatever the bond index is. Since the index has mortgage paper, whatever number is quoted is a guess. Outside of that, I would say I am pretty short, with nothing over 5 years. A lot is in cds with small surrender penalties. The stuff in bonds is about half in floaters and tips, the rest in fixed rate corporates that have a duration of probably 3 on average.

[Freedom56]

My take on interest rates moving forward into 2019 and 2020....

The yield curve will continue to invert with the 10 year note and 30 year bond likely to test the low yields set a few years ago. The only action that will stop this inversion, in my opinion, is when the Federal Reserve starts to cut interest rates again in response to the slowing economy. Much of the growth that we have seen is due to tax cuts and increasing consumer and corporate debt which now stand at record levels. Both corporations and consumers will have to deleverage over the next few years or face the prospect of default.

I have been liquidating my preferred and baby bond portion of my portfolio and raising cash as many of them that I purchased in late December that are up 17% which is more than two years of coupon payments. I am willing to bet that program trading that triggered the sell-off late last year will re-trigger later this year. It makes more sense for me to take gains of the table and float the cash in a money market fund yielding 2.38% and wait patiently as I did last year. The maximum duration of my corporate bonds are 12 years with the average around 6.4 years. I plan to hold those to maturity or early call unless there are some material changes to the company that would cause me to sell prior to maturity.

Those who hold CDs, Treasuries, and quality corporate bonds will do fine. By "quality corporate bonds", I mean those corporations that have sufficient operating earnings to cover their interest payments. Don't go by bond ratings alone. There are many investment grade rated bonds such as GE and Bed Bath and Beyond that should be rated as low grade junk as their fundamentals are deteriorating quickly.

[OldShooter]

Quote:

Originally Posted by NW-Bound ... If one truly believes in EMH, he will get some bitcoins as they are just another "asset" to diversify into.

I don't think even Eugene Fama would argue that the EMH applies to moonbeams or other intangible assets. The operative belief for bitcoin trading appears to be the greater fool theory.

[NW-Bound]

I don't think so either.

I will add that I do think that EMH has validity, but in the soft sense.

I still reserve the right to question the "wisdom" of the masses, in order to dissent when the world has gone mad. Of course it is not easy, but if we say something is impossible then we will never try.

[OldShooter]

Quote:

Originally Posted by NW-Bound ... I will add that I do think that EMH has validity, but in the soft sense. ...

We probably agree. Over the long term EMH has to work, but over the short term (<5 years or even 10) behavioral finance correctly observes that emotions and illogical behaviors can be a big influence on individual stocks and even on asset classes.

There is a very good video of Fama and Thaler discussing this: Are markets efficient? | Chicago Booth Review Basically I think they are both right.

Fama's last comment: "In general, it would be useful to know to what extent all economic outcomes are due to rational and irrational interplays. We don’t really know that." Me, too.

[Freedom56]

10 year note inverted below 3 month t-bill this morning and now also the 1 year. It's a matter of time before the Federal Reserve starts cutting interest rates again or we head into a deep recession.

[gstillson]

Quote:

Originally Posted by Freedom56 10 year note inverted below 3 month t-bill this morning and now also the 1 year. It's a matter of time before the Federal Reserve starts cutting interest rates again or we head into a deep recession.

Isn't it always a matter of time before the next boom or bust cycle?

[Freedom56]

Quote:

Originally Posted by gstillson Isn't it always a matter of time before the next boom or bust cycle?

This bust cycle is going to be particularly painful as both corporations and consumers are forced to deleverage or default. For those who are retired and debt free, inflation will be low and there will be plenty of travel and leisure bargains over the next several years.

[OldShooter]

Quote:

Originally Posted by gstillson Isn't it always a matter of time before the next boom or bust cycle?

Yes, of course. That's why a flattening yield curve is always followed by a recession. Someday.

[gstillson]

The stock market is one of the places where you can be right and wrong at the same time.

Predicting a 20% drop in the market that does happen eventually but not until the market has gone up 30% more first is one example.

[audreyh1]

Seems like the Fed is already pretty preemptive. Pulling back on the balance sheet unwind is a biggie.

[brewer12345]

https://www.cnbc.com/2019/03/22/bond...-happened.html

The above suggests there is typically equity upside for the next year or so.

[NW-Bound]

Maybe this time will be different.

Too many people are expecting another 20% stock increase from here. Some will sell at 15%. Some at 10%. Others at 5%.

[NW-Bound]

Quote:

Originally Posted by Freedom56 This bust cycle is going to be particularly painful as both corporations and consumers are forced to deleverage or default. For those who are retired and debt free, inflation will be low and there will be plenty of travel and leisure bargains over the next several years.

All right! One must always look for a silver lining. I may be able to procure that class-B motorhome cheaper.

During and right after the Great Recession, there were a lot of RVs on sale. And for many years after that, there was no new design as manufacturers were just trying to survive, and many did not. Now, they all have new designs which will be available to me for the next downturn.

Will I be able hold my nose and buy? That's the real question.