Lyn Alden: October 2022 Newsletter

[aja8888]

Anyone who follows the macro economic environment should have a look at Lyn's predictions based on her evaluation of the current world economic situation. There's lots of meat in here and I can't see much fault with her analysis.

https://www.lynalden.com/october-2022-newsletter/

October 2022 Newsletter: Energy vs Sovereign Bond Markets

This newsletter issue focuses on recent problems with developed country sovereign bond markets and how energy supply constraints pose an ongoing problem for them.

The Sovereign Bond Bubble

During much of 2019 and 2020, large portions of the developed country bond market were outright negative in nominal terms. Rather than getting paid interest, investors had to pay for the privilege of lending to governments and even some corporations, mainly across Europe.

At its peak, the amount of negative-yielding bonds reached over $18 trillion:




In July 2019, I wrote an article focusing on the high probability that we were in a bond bubble. I opened the article by highlighting that even though I had some concerns about stocks, I was even more concerned about bonds:

I read thousands of emails from my readers, and one of the key themes I see is that people are concerned about the next stock market crash, and perhaps rightly so. By many measures we have high stock valuations in the United States after a decade-long bull market, and we have high corporate debt levels both inside the United States and globally.

But one question I rarely receive is: “Are bonds safe?”

From a historical perspective, the bond market is acting a lot weirder than the stock market at the current time. The stock market looks like it often does at this point in the business cycle, which is not great for the probable range of forward returns, but bonds are doing things they haven’t done ever before in history, which should give investors pause.

Since bonds are traditionally considered the safer asset class, should this be cause for concern? Are we in a bond bubble? Or is this just how things are now? This article examines the issue.

-Lyn Alden, July 2019 “Are We in a Bond Bubble, or is This the New
Normal?“

 

[Freedom56]

He/She clearly does not understand bonds. They are doing exactly what they are supposed to do. The central banks are raising rates, bond are are adjusting their yields accordingly. This is how they always behaved. Bonds safety is a function of the solvency of the issuer.

 

[aja8888]

He/She clearly does not understand bonds. They are doing exactly what they are supposed to do. The central banks are raising rates, bond are are adjusting their yields accordingly. This is how they always behaved. Bonds safety is a function of the solvency of the issuer.

The quoted text is from her 2019 newsletter. If you read the whole article, she lays out what you have been preaching.

 

[Freedom56]

The quoted text is from her 2019 newsletter. If you read the whole article, she lays out what you have been preaching.

Back in 2019 when some sovereign debt went zero to negative, everyone and anyone with more than $100 in a bank account was saying that it was not a sustainable situation. The newsletter contains a lot of generic statements that could have been cut and pasted from multiple sources.

I have been telling people to avoid passive bond funds not bonds. Bonds mature or are called at par. I really don't see a scenario where we have massive defaults from fortune 500 companies or the USG. So it's not clear from the newsletter what is meant by a "bond bubble". What I have been saying is that bond funds hold too much low coupon debt and will be unable to increase distributions which is a fact. This will cause investors to flee these funds until the distribution yield is in line with other investment options with the same duration. That has nothing to do with the bond itself.

 

[MarieIG]

Thank you for posting the article aja8888. Yes, I did read it (and printed out her portfolio and recommendations). I am running around today, but will revisit it this evening.

Since my consideration of macro economics was obfuscated by "the fog of work" (credit Nords), it sometimes takes me a bit longer to digest the "meat" (some of the more technical aspects of the banking systems) although I believe I grasping the basic premise(s).

 

[copyright1997reloaded]

Back in 2019 when some sovereign debt went zero to negative, everyone and anyone with more than $100 in a bank account was saying that it was not a sustainable situation. The newsletter contains a lot of generic statements that could have been cut and pasted from multiple sources.

I have been telling people to avoid passive bond funds not bonds. Bonds mature or are called at par. I really don't see a scenario where we have massive defaults from fortune 500 companies or the USG. So it's not clear from the newsletter what is meant by a "bond bubble". What I have been saying is that bond funds hold too much low coupon debt and will be unable to increase distributions which is a fact. This will cause investors to flee these funds until the distribution yield is in line with other investment options with the same duration. That has nothing to do with the bond itself.

So you think having a long term (e.g. 20 year) bond with a 2% coupon is a good investment with inflation at 8+% simply because the bond will eventually be redeemed at par (assuming the corporation survives the next 20 years)?

Regarding defaults of investment grade bonds, you are correct. Even in the great depression, the % of IG bonds defaulting was less than 1% of the issuers. (Note: What isn't clear to me is whether issuers who WERE IG and then fell on hard times and lost investment grade status but did not default while IG were counted. For example, the high yield default rates in 1932 and 1933 were 11.0% and 15.7% respectively.)

All I know is this, I am glad I don't have long term debt (owning it) at near zero rates, even with the ability to hold to maturity. I am also staying well clear of high yield debt as the economy continues to deteriorate the spread between HY and IG will continue to widen.

 

[Freedom56]

So you think having a long term (e.g. 20 year) bond with a 2% coupon is a good investment with inflation at 8+% simply because the bond will eventually be redeemed at par (assuming the corporation survives the next 20 years)?

I didn't say that. I wouldn't even buy a 5 year note with a 2% coupon. I was accumulating cash since may last purchases in March 2020 from my maturities and coupon payments. I was earning next to nothing on my cash balances but I didn't care. I only started buying again this year and will buy aggressively during this coming tax loss selling season.

What I'm saying is that having low coupon bonds does not constitute a bubble. An individual investor would never buy a bond or note with low or negative yields, but a passive fund probably will. But it doesn't make it a bubble. Bonds still mature at par. Stocks have no par value. This person who writes these newsletter obviously has no financial background or understanding of bonds. Bond funds are in trouble due to their low distribution rates versus other investments available now, but individual bonds have corrected for yield. Bond funds are just sitting on unrealized losses and with time will correct.

 

[copyright1997reloaded]

I didn't say that. I wouldn't even buy a 5 year note with a 2% coupon. I was accumulating cash since may last purchases in March 2020 from my maturities and coupon payments. I was earning next to nothing on my cash balances but I didn't care. I only started buying again this year and will buy aggressively during this coming tax loss selling season.

What I'm saying is that having low coupon bonds does not constitute a bubble. An individual investor would never buy a bond or note with low or negative yields, but a passive fund probably will. But it doesn't make it a bubble. Bonds still mature at par. Stocks have no par value. This person who writes these newsletter obviously has no financial background or understanding of bonds. Bond funds are in trouble due to their low distribution rates versus other investments available now, but individual bonds have corrected for yield. Bond funds are just sitting on unrealized losses and with time will correct.

Bonds are just like any other asset class in that they can become overpriced. We've had year after year of near zero interest rates due to QE and other Fed activities. There has been similar stimulus by other central banks in other countries. This has resulted in borrowing for projects which made no economic sense (by governments, companies, and individuals).

That by definition is what happens in a bubble.

I am not discussing in any way bond funds vs. individual bonds. I agree that funds have may issues that you have addressed.

Will there be good buys as a result? For sure.
Are we there now? I'm not so sure given real returns are negative.

 

[Freedom56]

Bonds are just like any other asset class in that they can become overpriced. We've had year after year of near zero interest rates due to QE and other Fed activities. There has been similar stimulus by other central banks in other countries. This has resulted in borrowing for projects which made no economic sense (by governments, companies, and individuals).

That by definition is what happens in a bubble.

I am not discussing in any way bond funds vs. individual bonds. I agree that funds have may issues that you have addressed.

Will there be good buys as a result? For sure.
Are we there now? I'm not so sure given real returns are negative.

The massive super-bubble is in equities, crypto, SPACs, where valuations were created out of thin air. If you believe rates are going significantly higher, you will see the S&P back down below 1500. With rates where they are now, the S&P is extremely overpriced. Even the market cheerleaders on CNBC have stated that they are not going to be buyers until the S&P reaches the 3000-3200 level.

Go read my posts from March 2020, I was aggressively buying fixed income when the markets were in freefall. I will do the same this tax loss selling season.