The 10 year treasury is trading at 4.15% this morning after movements higher all week long–slow down!! As we all know preferreds and baby bonds will tolerate some level of higher interest rates, but they react best when the move is slow–a basis point or two in a day–maybe 5 basis points in a week. Movements of 10 basis points in a day can create investor pain. My accounts moved a little lower this week – July was an excellent month, but August is not starting out too well.
Today we have 2 large treasury bills being auctioned – 70 billion of 4 week and 80 billion of 8 week bills – we’ll see how those coming off.
Equity markets are a bit soft once again today and we’ll see if this is a turnaround Thursday – or is there more downside to come. Certainly equity investors have new reasons to sell – if an excuse is needed we have them. Potentially we will see some drifting today as we await the employment numbers. ADP showed hot employment for July – but this seemingly is meaningless as we saw last month when ADP showed hot numbers and the federal government showed softening numbers.
Did you see the excellent numbers posted by insurance company SiriusPoint (SPNT). Absolutely stellar. SPNT has a 8% cumulative preferred outstanding which almost certainly will be called in 2026 as it is a fixed rate reset with a very punitive spread of about 7.3% to be added to the 5 year treasury on 2/26/2026. I am pondering putting this on my watch list for the current yield of just over 8%. It is trading at $24.89–don’t want to pay over $25.
Bob, Elliot has a nice thread suggesting long term rates will remain elevated for a while. His analysis is focusing on the demand and supply balance.
I’m focused on reasonable returns (7-9% YTM) for 3-5 year duration.
His thread follows.
https://twitter.com/BobEUnlimited/status/1686724206417891328
It seems to me that we may be contemplating a generational trade:
The assumption is that rates are at (or close to) peak and that they will eventually drop in the next year (s). This may work if you have the cash now, can hold until rates drop and then will know what to do with the money when you sell (e.g. buy preferreds or stocks or something else)
The idea is to start buying long term, 10 or 15 yr, treasuries now and sell them when rates drop. Yield now is about 4.1%. When the yields will drop, the price of the treasuries will go up. For ex. if I buy at $100 now, when rates drop a little, even to say 3.5% I could sell at $117 or so, a nice 17% profit in addition to the 4.1% interest (if rates drop to 3% then I could sell at ~$137!). If however, rates do not drop in the next 10 years, then I will only make the 4.1%/yr.
The same would be true for any long term fixed income of course, with the difference that with treasuries there is no risk nor liquidity issues.
Doesn’t this look to you as a generational trade?
Well I thought so, so I started nibbling on ZROZ/EDV. Getting my head handed to me today. I had 3% spreads but maybe I should use 5% spreads?
Threading the needle is difficult!
TLT getting punched in the eye again as longer term rates try and catch up to the shorter stuff.
yazzer,
A “punch in the eye” or a generational opportunity?
Isn’t it becoming a bargain to buy into TLT? Assuming that long term rates are at (or near) top, If you can hold on days like today that rates go up, I think that when rates finally drop even a little, TLT bot at $95 could be sold above $110, $120 (see my previous comment on the generational trade). Wouldn’t you agree?
I am starting to “toe in” to TLT myself
dd
Interesting question.
I am pretty deep into TLT at an average cost of 99.
Currently fairly underwater.
4.2% is the highest the 10 year T has been since 2008.
So…. how much higher can it go?
In 2006 it hit 5.2%.
My chart doesn’t go past that point but we all know the past 20 years have been goldilocks for all debt rates.
A lot more than TLT is riding on the outcome.
The stock market is up 20% betting that rates are heading down.
Ackerman is deeply short term Treasuries betting that higher rates are our future.
If rates stay high, we are in uncharted territory for all investment instruments – stocks, bonds, government debt- for a world addicted to debt and loaded with it.
Like every investment decision, we all make our own choices.
This one’s the biggie.
Right now I’m sticking with my loss.
Can’t tell whether I’ll go deeper or fold some.
What the heck.
YOLO
Just went deep TLT at $94.80
Brother, can you lend me a dime?
You guys are taking the other side of the trade from Ackman
https://www.cnbc.com/2023/08/03/billionaire-investor-bill-ackman-says-hes-shorting-30-year-treasury-bills.html
Hey Westie.
Let’s do this yolo thing.
Get yourself some 100 year Bowdoin (ok 90) bonds paying over 6% yield.
Set it and forget it.
I dunno.
Isn’t Bowdoin in Maine
Isn’t it really cold up there?
Does that work for YOLO?
in 100 years, it’ll have weather like FL and palm trees growing!
9:50 TLT $95.70
Serendipity (definition)
“the occurrence and development of events by chance in a happy or beneficial way:”
Uncharted territory? I guess you weren’t around in the late 70’s early 80’s…. https://www.macrotrends.net/2521/30-year-treasury-bond-rate-yield-chart
And beyond just Fed strategy, when does supply/demand enter the picture? The Fed has more control over the short end than the long end so sooner or later, ya gotta wonder if Demand uses the famous words of Roberto Duran to say to Supply, “No mas! No Mas.” https://www.youtube.com/shorts/mA4Xo-2nLSA
Westie,
“how much higher can it go”? The answer is: a lot! But consensus (except the Ackerman’s) is: it may be close to peak.
See the ^TNX graph (e.g. in yahoo), it hit 15% in early 80s, was around 7% in the 90s. So could it happen again? Yes: wars, the big earthquake in CA, another much deadlier epidemic, a UFO invasion, A.I. taking control of wall street, who knows? Does anybody expect it? I think most agree we should be at or near top for this cycle. Even if they are right, nobody knows for how long it will stay at the peak and begin to drop, do they? Thus I tend to prefer a very conservative approach by very slowly nibbling for now (I bot just a few shares of TLT at $94.80 today).
Because nobody really knows, as an III, I only ask the question: do I want to buy perpetual preferreds now, or term investments like 10yr treasuries. In either case, when the rates drop, I will have lots of capital gains, and if the rates continue to go up, I will have lots of losses, but with 10yr terms like treasuries I will get my $ back in at most 10yr (as opposed to perpetual preferreds who may stay low as long as rates are high).
Does any of this make sense?
Here’s a 54-year chart for the 10Y. https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart . If you believe in technical analysis, the next stop higher if it breaks these levels could be upper-5% area, maybe 6%. The long-term chart shows way up to 15% back in the early 80s. I doubt we get there but 6% seems possible from a purely technical view – fundamentally, probably doubtful.
As far as TLT, I have been looking at selling the puts below. You can get over $1.00 for the Oct puts and over $2.10 for the Jan, both 90.00 strike. Or, just take over $1.00 for the Jan 85 strike. Break even for the Oct/Jan 90s would be 89.00 and 87.90, respectively so some breathing room if wrong. I wouldn’t have a problem owning TLT in the upper 80s like that. If going to the Jan 85s, then break even is a bit below 84.00 so a LOT of breathing room.
Just some ideas that allow some income with less risk. But, that said, if TLT does rocket higher, you miss that profit opportunity. Perhaps, a good middle of the road strategy might be to sell the ATM puts – Oct is about $2.90 for the 95.00 strike and Jan is 3.90, making b/e at 92.10 and 91.10, respectively.
I am looking at the Oct 90s myself or maybe even Sep.
Athene posted good results (under Apollo). Looks like insurance outfits will try and redeem whenever possible as a lot of them have higher rates or will float to still higher rates. Annuity business models under Private equity have been questioned but for now they seem to be doing OK