Freedom56
Thinks s/he gets paid by the post
Do you think there's a good chance of this happening?
I'm trying to figure out how to generate income in more than five years. Right now, the interest rates for longer durations are lower than the shorter term bonds. I assume that's because people think that the Fed is going to lower interest rates in the next few years. But, if that's true, doesn't that mean that interest rates for longer term bonds are going to go down in the coming months as more and more of the timeframe is likely to be during a period of decreasing interest rates? If I invest in 2-5 year bonds now, where do I invest that money when the bonds mature?
The market assumes that the economy will slow down and therefore long term rates are lower and we have an inversion. The other issue is the inventory build-up in the economy causing corporations who were happily gouging consumers, are now forced to liquidate inventory at fire sale prices. However there is still a $1.8 trillion infrastructure bill that has yet to hit the ground that will keep the labor market strong. So it's not clear at this point how long the Fed will keep rates at their target terminal rate. I really won't invest in longer durations until there is some yield premium. My current ladder runs 8.2 years and there is a void between 6 and 8.2 years and over time my current ladder will collapse into a rolling 5 year ladder. Shorter ladders reduce volatility and risk considerably. Also the Fed induced market crisis events have been occurring on a regular bases and fits nicely within a 5 year ladder. So as long as passive bond funds around, there is 100% certainty that funds will continue to sell off their holdings when markets correct or the Fed threatens to raise rates. So there will always be opportunities to time bond purchases.
To answer your other question, it may be a while before JP Morgan issues 8.5% 10 year notes and it's not really likely to happen. You may be able to by a 10 year JP Morgan or other major bank note at a YTM of 8.5% during a severe market correction. That is a more likely scenario. The credit markets function on the basis that the longer the duration the higher the risk. This is why shorter term loans have lower rates than longer duration loans. This also applies to corporate debt with shorter durations still have lower coupons than longer durations despite the fact that that treasury yields are inverted. Right now you as the lender are taking the risk of a longer duration without any rate premium. I just won't do that given the up and down cycles that I expect to continue in the future.