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Best month for bonds in nearly four decades

edited December 2023 in Fund Discussions
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%.





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Comments

  • Anecdotally, I can confirm your observation about junk corporates.
    PRCPX in Nov. + 4.55%
    TUHYX in Nov. +4.00%.

    You're making too much sense! No arguments here.
  • edited December 2023
    I recall fondly this excellent thread (from May 17) containing many diverse opinions. What stood out to me was the voracity with which the proponents of cash (rather than bonds) voiced their opinions. Not to imply they were wrong. Just that it’s been really rewarding for bond / bond fund investors the past couple weeks watching the turn around. Some memorable comments from this spring.


    - ”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.”
  • in addition to bonds, a big rally surrounding pretty much all interest rate sensitive areas...preferreds, REITs, financials, infrastructure. What a month!
  • edited December 2023
    And techs, gold, cryptos too. It was a fantastic November.
  • edited December 2023
    hank said:

    I recall fondly this excellent thread (from May 17) containing many diverse opinions. What stood out to me was the voracity with which the proponents of cash (rather than bonds) voiced their opinions. Not to imply they were wrong. Just that it’s been really rewarding for bond / bond fund investors the past couple weeks watching the turn around. Some memorable comments from this spring.

    Well, you seem to be (read, "are") picking on me with those quotes, so here's my reply.

    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.
  • Different strokes for different folks.

    Take a deep breathe & relax, Derf
  • edited December 2023
    https://apple.news/AYf7Zw7qKRZ-4t7kE8--gIw

    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.
  • edited December 2023
    Thank you for bringing that old post up, @hank. I certainly remember being attacked in that thread for having and opinion that bond funds may be ready to come back and have a good year and future, and that maybe CDs weren't the only investment option available, though still acknowledging at the time they were still a nice option. Even my beloved Bills were attacked :)
  • I don't need the bond divvies yet. But they are pretty juicy in my junk funds, and it pleases me. An FDIC-insured CD is an excellent idea, too. But unless I'm mis-using the term, the CDs behave like zero-coupon bonds. There's no current income, along the way.
  • edited December 2023
    Bond funds EMPIX and CBYYX discussed by Junkster are very interesting and impressive indeed. They invest in catastrophe bonds (CAT bonds). These two funds are pretty new. Both funds are 11% up YTD, rising in an upward trend, which is even more steady than the familiar FR/BL funds often discussed here.

    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.

  • edited December 2023
    Great write up finder. You have really immersed yourself on these co insurance funds. One thing I am not sure we talked about in the past offline is Stone Ridge Asset Management. They are the go to fund company for reinsurance funds of several varieties. Their flagship fund I believe is SHRIX which has been around for many years. Note like the two funds you mentioned how this fund has enjoyed a steady ride up in 2023 with a 20% return YTD. But also note its returns prior to this year. Nothing to write home about and make me wonder if 2023 is simply an anomaly and never again to be repeated.


    https://www.morningstar.com/funds/xnas/shrix/quote
  • man o man did i get locked out once again. burned on the two previous rallies, had little faith in the third, which is of course the current one. sigh.
  • edited December 2023
    Junkster, I am ashamed that I missed SHRIX; it is phenomenal. Somehow, it did not appear in any databases that I searched, and it is not available at Fidelity, and Vanguard. Their prospectus says that it is sold only to institutional investors with a minimum of $25M, but one can buy it at Schwab at $5M minimum. Too bad...

    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/
  • edited December 2023
    MikeM said:

    Thank you for bringing that old post up, @hank. I certainly remember being attacked in that thread for having and opinion that bond funds may be ready to come back and have a good year and future, and that maybe CDs weren't the only investment option available, though still acknowledging at the time they were still a nice option. Even my beloved Bills were attacked :)

    Well, the name of the thread sounded so innocent - ”Anybody Investing in Bond Funds?” Didn’t seem like a combative topic. But the thread soon turned into more of an “ambush” than a rational discussion of bonds / bond funds You’d need to be closeted away (maybe on Mars?) not to know how badly bond funds performed in ‘22. It takes a much longer term focus to really understand bonds / bond funds and how they work in the context of a diversified portfolio. Cash provides a form instant gratification. The bank or issuer tells you exactly what you are going to get in turn for your investment. Tack that 5% CD up on the wall and forget about it. Few assets can match the appeal of cash for stability. Buy anything further out on the risk spectrum … be prepared to wait a while for your rewards,
  • Yes, November has been a good month for everything including bonds. I mentioned about reinvestment risk earlier this year as we extended bond duration to intermediate term bonds. Additionally, we took more risk in investment grade and some junk bonds. These bonds went up in November ~3-4% total return. Some are in double digits gain for the year. As @junkster mentioned bonds are having one of the very solid gain in many years.

    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.
  • edited December 2023
    As previously mentioned, Randall Forsyth addresses bonds this week in Barrons.. I get the impression he thinks most of the easy money has been made - but he’s not negative on bonds. What he really likes are CEFs. One reason many CEFs are selling far below NAV is that they use a lot of leverage which requires borrowing. So lower rates should boost their prices.
  • edited December 2023
    Buying esoteric risk or funds requires that one is like a zen master, without mental frictions, so one exits the position as easily if necessary. IMO, these are not for people who are overly analytical or those that need a lot of answers before acting.

    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!
  • Fund managers are more adept with callable bonds.

    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.
  • edited December 2023
    I started a huge position several months ago in CBYYX and emailed someone on this thread. Finder did an excellent job presenting this data already. I found https://www.artemis.bm/ as well and used it as my guide. On that site, you can find an explanation of most of the holdings. Example: Stabilitas is CBYYX biggest holding see this=https://www.artemis.bm/deal-directory/stabilitas-re-ltd-series-2023-1/
    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.
  • edited December 2023

    Fund managers are more adept with callable bonds.

    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.

    Yogi,

    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.

  • I know it feels like a moment for everything is awesome for bonds. Can’t help but remind buffets article from June. High fiscal deficits have consequences. There is zero political will in Washington to exercise fiscal virtue.
  • @Devo, question sir, what are the potential consquences of the fiscal deficits you mentioned above...more treasury issues starting in Jan 2024..with many not sure who is going to buy them...does this mean higher rates or minimal impact? Isn't the treasury due to issue a lot of bonds in 2024 due to the debt load? What happens when many corporations debt comes due in 2024 and they need to roll it over...is that the time when the real effects will be felt?

    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
  • edited December 2023
    Devo said:

    I know it feels like a moment for everything is awesome for bonds. Can’t help but remind buffets article from June. High fiscal deficits have consequences. There is zero political will in Washington to exercise fiscal virtue.

    Whenever I get giddy over a trade I often use myself as a contrarian indicator. Besides rates falling too quickly and too fast I worry about the price of gold which has been rapidly rising, I worry when I see orange juice futures recently at all time historic highs. I worry when I see cocoa futures ( think chocolate) at highs not seen since 1978. I worry when I see stocks nearing all time highs and igniting another round of inflation. For rates to keep dropping I would like to see more definitive signs of a slowing economy. Friday’s employment report could be one of the more pivotal ones in many a moon.



  • edited December 2023
    @baseball_fan, I am not a macro economist and therefore not best suited to answer any of these very valid questions you ask. I am sure there are others on the forum with good skills. I try to approach a lot of such questions from the perspective : Who is the best person I know and trust in this specific area and what are they doing? In response to that inquiry, two people come to mind. The berkshire hathaway portfolio (buffett) was still 160$ billion in short-term t-bills as of quarter end September. We dont know of any changes this quarter though. Second, @davidsherman wrote in his quarterly "No fat pitches" that the long end of the bond market was neither a great long nor a great short.

    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.
  • ooh, bnd up 3%, woohoo

    serious loser of an investment for 2y now, amazing

    thinking cat bonds are going to be the future
  • edited December 2023
    The intermediate term, 5-7 years, is the sweet spot. Those who bought long bonds when they were down double digits, they have since been rewarded handsomely. Ironically junk bonds are out-performing treasuries so far. If and when the economy turns downward, this trend will reverse quickly.

    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.
  • Sure. Check out VGIT 3-2-1y.

    Up 2% the last month, almost. More woohoo.
  • edited December 2023
    A bond trader doesn't care what happened, only how to make money in the future.
    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.
  • yes and most here were safely positioned in tbills or cash.:)
  • edited December 2023

    yes and most here were safely positioned in tbills or cash.:)

    +1

    “… 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.)


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