Sorry for my inept/abbreviated post. I was thinking as I was typing, so it’s amazing that it even came out in complete words. I suspect that the economy will go into recession in months 18-36 from now. I don’t think the fed will have the guts to continue to fight inflation (Volker was a man) as POTUS, loud mouthed members of Congress, social media piglets, ignorant (piglet) media, etc., complain about high/evil/anti-worker interest rates. At some point, many months after 18, rates may start to rise again, but then it’s trending toward 4% being underwater.
Presuming my thinking to be correct, these bonds will be called. I hope to sell them pre-recession or at [some Biden joke here] early onset recession, or, at worst, prior to being called.
OK, so you’re thinking interest rates will decline, thus triggering the call. You hope to unload your bonds prior, at a profit I assume. Because even should your bonds be called it would happen at par . . . . so no loss there but no profit, either.
I’ve never traded, or aspired to trading, bonds like that. Bond trading is something I leave to the pros. It’s because my ability to predict future interest rates is highly suspect. Unfortunately.
Don’t forget the Fed is threatening to unwind its balance sheet a month or two out. Only God knows if they really will, or if the sales will be at all substantial. But if they do, that would mitigate in favor of higher interest rates.
I’m no pro, or anything akin to one, although I have a supposed/technical kinship to the bald eagle (quarterback, not avian). Regardless, I don’t want to be stuck with 4% (2042) bonds in 2030. I suspect they will be underwater long before then, regardless of who controls the govt. I could be wrong, but it’s my money, so I can make as many errors as I want, possibly to someone else’s benefit.
About fifty years ago plus or minus, as I was getting into bonds, I experienced something of a mathematical revelation. I’ve never seen this anywhere else, so obviously it could just be wrong. Nevertheless:
It seems to me when you make a bond purchase you (in essence) lock in your yield regardless of future sales of those bonds. Consider:
If you buy bonds and later sell at a loss, your loss will have come owing to higher prevailing rates at time of your sale. You will have less money but be able to re-invest that money at a higher rate if you do so straightaway.
Similarly
If you buy bonds and later sell at a profit, your profit will be as a result of lower prevailing interest rates. Thus, even though you have more money, if you re-invest in bonds straightaway your income will be about the same as before your sale.
The above is very rough. It ignores commissions and assumes immediate reinvestment of bond sale proceeds. OK, so what if the reinvestment is not immediate? What if you have great timing, wait, and reinvest in a more opportune bond market environment?
If you sell a bond and buy another bond, you are exactly right - there is no profit in doing that!
This is probably true of all investments - when you sell, you better have another place to put the money. For those who trade / time the market, the idea is to rotate between asset classes like bonds, stocks, real estate etc assuming they aren’t all overvalued or undervalued simultaneously.
I guarantee that I won’t have great timing, but to reiterate … I think the Fed, under intense political and media pressure (because the media is no longer an observer), will fold their rate-raising, anti-inflation tent. This will lead to a brief period of falling/bouncing rates.
I read a decent article in the last couple of days about this being the first WillSmith moment for the entitled generation. They will not take the idea of a “budget” lying down.
Once the Fed folds, it will be the world that forces us to raise interest rates … and they will.
Indeed interesting. Also not true. I am dismayed by the national debt regardless of who is in power.
But if you look at the left scale on the plot you link, which plots as a fraction of tax revenue, the current 13% matches the historic highs during the Democrat Truman and Clinton administrations. The 2019 value during the Republican Trump administration was about 9%. That is also too high IMO.
The Democrats are currently scheming on how to convince Senators Manchin and Sinema to allow them to borrow many $trillions more.
Right, because those administrations are responsible for the fact that the payments happen to hit historic highs during their administrations? That’s an incredibly ridiculous conclusion.
this disclaimer of responsibility does not wash. We are well into the second year of the Biden administration. They have increased the debt tremendously during a period when the Democrats controlled the House and the Senate. As I mentioned above, they are scheming to increase the debt even more.
I’m with you there but he has a point still when saying GOP are only concerned about deficit spending and the debt when Dems are in power.
In 2017 when Trump enacted his tax cuts that never paid for themselves and setup the sharp increase you see in debt payments in 2018 and 2019. The only GOP senator who did not vote for it was John McCain for health reasons, even though the CBO had scored it as increasing the debt by 2.23T over 10 years. 4 years later, suddenly all the GOP became deficit hawks and block the Dems’ own deficit spending proposals. Just like Schumer did in 2017 for the Trump’s TCJA as he claimed to be seriously concerned about how TCJA would add to the debt (but now is ready to spend spend spend for Dem’s pet projects). Conveniently short memory there.
It’s obvious the debt and deficit spending is just a tool to all of them. They use the debt and deficit spending to frame their discontent with HOW the money will be spent in terms of something they can sell to their voters more easily.
Regardless of partisan finger-pointing, we should not obscure the fact that the Fed is strongly constrained in their ability to fight inflation by increasing interest rates. The debt is so large that the interest on it will grow beyond our ability to pay. The government can try to print money to pay for the interest but that will rapidly spiral out of control.
On the topic of the thread, this could be catastrophic for bonds. Interest rates have gone up but they are nowhere near inflation. Bond holders are losing principal as interest rates go up and the interest they are receiving is far below inflation.
I bonds with thr current 0 fixed rate, although better than others, are sure losers to inflation because the federal government taxes the interest payments.
each of these cycles was very long-lived. This current one has been, let’s say, 40 years. That’s one-and-a-half successful Wall Street careers. You could be working in this business for a long time and never have seen a bear market in bonds.
Central bankers everywhere are feeling the pressure to emulate Paul Volcker, the Federal Reserve chair who famously tackled inflation by cranking up interest rates in the early 1980s. “Reducing inflation is of paramount importance,” the usually dovish Fed Governor Lael Brainard said earlier this week. But as U.K. hedge fund manager Crispin Odey, who’s made big profits this year betting against bonds, put it in a letter to clients last month: “Everybody knows that the West is bankrupt somewhere around interest rates of 3%, so the fight now is how can 0.5% interest rates slow down inflation which is potentially on its way through 10%.”
edit. for a much better link see the post by shinobi next to this one.
