oh my... DUDE IS BACK IN THE MARKET?!
Since I've covered Mr. Kirk's otherwise quite insightful market commentary (#1439642, #1470136, #1478065), he's always posted zeroes in his public portfolio -- that is, cash or short-dated bonds only. Until this week.
NOW HE'S HERE, AND HE'S NO LONGER QUEER!
Boring af, of course, since it's mostly a concentrated portfolio of global index funds, overweight UK and Japan... and a single, 18.5%-weighted position in a long-dated UK Treasury bond?!
I truly understand nothing. (Also, whoever says "Bitcoin is risky" needs to investigate this guy's irresponsible behavior)
Bonds suck, Mr. Kirk says:
The trouble is, almost nobody understands bonds — including professionals who have worked in finance for decades. Next time you speak to your adviser, ask them to explain carry, basis risk, term premia and convexity.
oh-oh, he's gobbling up pennies before a steamroller
You may have read that long-term yields have reached multi-decade highs in many places around the globe. This means bond prices are falling. Indeed, this inverse relationship in itself is enough to baffle most of us. Only last night I had to explain the concept again to my clever mum after her gilts had taken a pummelling. The nuts and bolts of bond pricing are Chinese algebra in comparison. It’s beyond me. But I can see the simple mistakes other ignoramuses make. And five have popped up repeatedly as the bond rout intensified.
THE FIVE ERRORS IN UNDERSTANDING BONDS:
- Believing that bond markets know everything. They're scary, thus must be correct. or something?
- "comparing bond yields with earnings yields" is a bad idea
any relationship is meaningless in theory as well as in practice. It’s apples and pears. Bond coupons are fixed while earnings (and dividends) rise and fall with inflation. They shouldn’t relate to each other — and they don’t. Look at a long-run chart. No correlation whatsoever.
- yields rising have nothing to do with government fiscal insolvencies. (Noo...??)
rising 30-year yields are due to bond investors losing faith in cash-strapped nations being able to reduce their sizeable debt-to-output ratios.
maybe the occasional short-term fright, but it's all just "expectations of inflation far into the future." uhuh... "Debt levels only have a minor influence on this premium for countries with credible central banks"
....aaah, and there we got his bond investment play
current inflation shapes inflation expectations. That is why bonds sold off last Friday after US consumer prices for April were higher than expected. It’s also why — if you reckon as I do that inflation will moderate when the Iran conflict ends — you should be buying bonds.
- Don't just blindly quote five-year-five year forward inflation: "Only surveys reveal what investors think inflation a decade down the road will be."
- Don't conflate inflation-linked bonds with a metric for "real yields"
The long list of complex factors that influence bond prices is also why inflation-linked bonds are not a substitute for measuring real yields. Conflating the two is the fifth misconception that drives me potty.
I. Have. No. Words. (It is Pizza Day, #1494750, maybe just ignore noise and stack some sats...? Also, Mr. Kirk wants @BlokchainB to launch a Stacker_Bonds territory)
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I wouldn't be lending the British Government money for 8 years at 4.5%. Why would you do that when you can get 4.19% on a 1 year?
You might want to lock in a nominal return of 4.5% for 8 years if you expect rates to go down in the future.
Doesn't sound attractive to me, but there are some who might want to do that.
I am sure long bonds will rally a bit if rates drop but there doesn't seem to be a lot of demand these days to lend governments money for longer than a few months to 2yrs.
does it matter that much if you're just using the long bonds for a short-term trade? (Essentially, riding the implied leverage)
you would do that if rates fell sharply below 4.5 after the one year. Then you would be glad to have "locked in" guaranteed 4.5. Also inflation would have to fall well below that for the return to be appetizing.
In other words: only theoretically, not happening in practice. Only banks who are forced by law to do it, do it.
Duration... Bond convexity.
(he hinted at it in the piece, lower inflation post-Iran peace is gonna rally the long bonds more than the short. Some resources here #1430666)
I disagree. The trend is growing demand for short term treasuries. Unless we are flipping to a deflationary environment I don't see a huge rally for long term bonds in the future.
disagree with his take, or the trading implication of his assessment?
Yields going up mean bond prices are falling is easy to understand when you understand what a bond is.
It's a promise. Buying and selling bonds is buying and selling promises. The specific promise is usually $1,000 on a fixed date. So if that looks less desirable, demand goes down, price of bond falls, yield goes up.
Ba da bing ba da boom
Incredible!
hating bonds isn't only a Bitcoiner thing. Even stocks people have understood TINA. There Is No Alternative.
The financial construction of our system. The literal worldbuilding of this world. It cannot be profitable to lend to the state in the long run in a fiat system.
yup
Absolute facts!!
https://m.stacker.news/142227