Bond outlook is improving

29 בספט׳ 2023

This week the TLT long-term US Treasury bond ETF bounced from a key support level.

Meanwhile, the three-month rate of change on core PCE—the Fed's preferred inflation measure—dropped to 2.2%, near the Fed's 2% target. With a looming government shutdown, we're also seeing the first serious Congressional effort to impose fiscal discipline in a long time. Any serious spending reduction would be positive for US bonds.

I don't think the economy is in imminent trouble, so I don't expect bond prices to rapidly climb from here. But I do think the worst of the selloff is probably done and it's a decent time to lock in that ultra low-risk mid-4% return.

3 בינו׳

הערה

Economic data have deteriorated enough, and volatility is cheap enough, that I went ahead a YOLOed a January 2025 TLT call option today.

5 בפבר׳

הערה

There's definitely some labor market weakness under the hood despite the strong headline BLS numbers. Quit rate is below pre-pandemic levels, JOLTS is below pre-pandemic trend, full-time employment is rolling over, and average weekly hours has plunged.

Initial claims for unemployment insurance looks stable, so no big surge of layoffs. But continuing claims are steadily rising, which suggests a widespread hiring pause.

If these trends accelerate, we could easily see the Fed do big interest rate cuts all at once.

5 במרץ

הערה

I have greatly trimmed my bond exposure. The gold, currency, and international equities markets are signaling that we are going to return to inflation in a big way, and that the current Fed futures and Fed dot plot rates are way too dovish. I expect bond rates will rise over the next month as Fed futures adjust. Bostic already signaled a hawkish pivot in his remarks this morning, which indicated the Fed will pause after a single third-quarter hike.

10 במרץ

הערה

Looks like I badly mistimed everything about this trade. Entered way too early, and trimmed right when the market decided bonds' time has come. By the Taylor Rule, bond yields are now at neutral. As long as inflation continues to come down, the Fed can cut rates. Yields indicate either that the market believes inflation will continue to fall, or that the Fed will make a policy mistake and cut anyway. Either of those things may be true, though personally I am seeing signs of reacceleration on the inflation front. Anyway, I'm keeping my bond exposure modest, with a mix of cash and cash-flowing equities.