TLT is up 20%
2-Jan-2024. TLT is up 20%. iShares 20+ Year Treasury Bond ETF (TLT) is already over 20% from the current cycle low of October 19, 2023 (Figure 1), but virtually flat from the previous cycle low (8-Nov-2018, see Figure 2). The full cycle first meant an increase of 60% (from 8-Nov-2018 to 9-Mar-2020), then a decrease of 50% (to 19-Oct-2023), and now we are rebounding >20%...
long treasuries
20-Nov-2023. Long Treasury Bonds. Almost 10% up. Rates of return since the recent low in October 2023 (Chart 1): 1) US 20+ Year Treasury ETF Total Return: +9.10% 2) EU Govt Bonds 15-30y ETF Total Return: +7.58% But in the long run there are still significant losses. Counting from December 31, 2018 (in October/November 2018, we had the bottom in the previous cycle), Chart 2: 1) US 20+ Year Treasury ETF Total Return: -17.49% 2) EU Govt Bonds 15-30y ETF Total Return: -21.19% From December 31, 2006, Chart 3: 1) US 20+ Year Treasury ETF Total Return: +67.59% 2) EU Govt Bonds 15-30y ETF Total Return: +63.71%
20-Nov-2023. What’s the upside to the all-time-high and what’s the margin of safety in the case of downside? Long Treasury Bonds. Part 2. In the case of iShares 20+ Years Treasury Bonds ETF upside to the all-time-high is as much as 81.5% (Chart 1). And what's the downside? It depends mainly on future inflation, but in case of the downside we can also talk about the so-called margin of safety, which now is supported by the current high yield of the ETF’s portfolio (current average yield to maturity is 4.76%). Margin of safety is the maximum range of increase in bond yields in the ETF's portfolio so that we do not lose money in the next 12 months. With an effective duration of 16.46 years, approximately yields could increase by as much as 78 bps on average within a year and we would still not be at a loss. For example, in the case of 10-year US bond, the current yield is 4.46% (we would see a loss only after exceeding the level of 5.24% - the difference is our margin of safety). Chart 2 shows the size of the drawdowns. In 2023, the drawdown was record-breaking, as much as 49.5%. Chart 3 shows the total returns for the iShares 20+ Years Treasury Bonds ETF since the bottom of the cycle (for 2007-2008; 2018-2020; and 2023 cycles).
UST: 2023 vs 2006-2007
11-Oct-2023. 10y US Treasuries yield is already down by some 25 bps from recent peak! If we are: (i) in the H4L – higher for longer setup, (ii) the last FED’s hike is behind us, and (iii) economy is strong enough to withstand federal fund rate above 5%.. then we should get a long FED’s pause… The current situation resembles the years 2006-2007, when the pause lasted as much as 15 months, and the spread between the federal fund rate (mid-band) and the 10Y was not greater than 82 bps throughout the pause. Today, this would mean the 10Y yield should generally not fall below 4.55% (fed rate mid-band is 5.375%). Currently 10Y is at 4.56%. In 2007, the above spread widened to 92 bps only about 10 days before the Fed's first rate cut on September 18, 2007.
CPI vs US treasury yields
7-Oct-2023. CPI vs US Treasury Yields. Update. (1) First chart. UST yields left axis. Inflation YoY right axis. Highest inflation June 2022: 9.06%; 10Y yield (monthly average): 3.13%; 2Y: 3.0% Lowest inflation July 2023: 2.97%; 10Y: 3.75%; 2Y: 4.66% October 6, 2023: - inflation for September 2023: 3.69% (Cleveland FED's Inflation Nowcast), - inflation for October 2023: 3.48% (Cleveland FED's Inflation Nowcast), - 10Y: 4.80%; 2Y: 5.08%. And also for complete sort of overview, e.g. August 2021: inflation 5.25%; 10Y: 1.28%; 2Y: 0.21% Generally speaking, one could say that the market was not concerned about inflation .. until .. it dropped to the range of 3.0-3.7%. (2) Second chart. The same data series but on one axis. One could say that inflation has made a round trip but the yields are on the one-way road.. i.e. only rising... Looks like inflation isn’t the main concern of the market ... go figure.
long duration UST or S&P500?
26-Sep-2023. Long US Treasuries or S&P500? Total return from 2007 to Q1/Q2 2020 was about the same (after 13 years). Since 2020, stocks have clearly beaten bonds (Covid-19 & inflation)... but that's only slightly over 3 years... As of May 31, 2020, the annualized rate of return (total return) since December 31, 2006 was: For US Treasuries +8.06% For Euro Govt >15 +6.96% For S&P500 +8.06% (see chart) And as of September 25, 2023: For US Treasuries +3.04% For Euro Govt >15 +2.75% For S&P500 +9.02% (see chart) For rates of return to be equal, US Treasuries should increase by 157% or the S&P500 should fall by 61%. Of course, everything in between will do the math as well... :)
Is oil leading yields?
3-Jun-2024. Is oil leading yields? After today's weaker ISM Manufacturing PMI (a drop from 49.2 to 48.7, with an increase to 49.6 expected), we have quite a strong reaction to oil prices (WIT falls 3.8% today.., btw.. good luck to OPEC+ with their exit strategy of production cuts). Bond yields are also falling significantly today (10Y UST is down 11 bps). The dollar weakened meaningfully (the dollar index is down 0.54%; and the EURUSD is up +0.46%). The S&P500 closes the day practically flat (but Nvidia is up 4.8%... definitely after good weekend news from Taiwan). But is the falling oil price somehow leading tumbling yields? – see Figure 1. This may not be a perfect correlation, but recently oil prices seem to be ahead of rates.. Figure 2 shows the same, but in a longer time frame.... Except for the second half of 2022 (rising yields, falling oil prices), the relationship is quite significant in the medium term. Figure 3 shows an even longer time horizon, starting from 2015. Falling oil price certainly needs to be watched and may contribute to falling bond yields.
