Vanguard says ‘bonds are back’

[FD1000]

(link).  Active Fixed Income Perspectives Q3 2022: Bonds are back.

Looking ahead
Positive real yields now exist, with bond yields higher than expected inflation over the next five years and beyond. Corporates, municipals, high yield, and emerging markets present more opportunity than any time in the recent past. TINA has resigned—bonds offer an alternative with reasonable income again and have reestablished their role as a portfolio hedge to equity risk.

* We are duration neutral, but we have shifted from a curve-flattening bias to more exposure in the intermediate part of the yield curve where we see better value.

* We are more constructive on MBS at today's valuations and see opportunities for MBS as an alternative to higher-quality credit exposure.

* Investment-grade corporates could see further spread widening, but yields are approaching 5%. Pharmaceuticals, utilities, REITs, and financials offer value.

* With a broad 20% decline in EM bonds so far this year, there are attractive entry points across the quality spectrum.

* High-yield bonds are trading at discounted prices. We see better risk/reward in higher-quality segments, but this market offers opportunities to pick winners with larger upside.

[mozart522]

Thanks, FD.. I'll probably wait and see what happens after the next rate hike or two. for now. I'm happy with increasing guaranteed income from MM. As you have pointed out, a 4% bond fund is not distributing 4%/ year at this point.

[retiredat48]

Thanks FD. Don't see much discussed lately about quantitative tightening (QT), whereby fed will be monthly selling off some of its bond portfolios. In Sept this QE will be DOUBLED in amounts by the fed. Heard one guru consider this QE is worth the effect of a 50 basis point minimum increase of the fed funds rate. If QE has major impact, longer duration bonds will be affected negatively. And fed may not tighten so much in September!

R48

[FD1000]

Aug 9, 2022 2:18:04 GMT retiredat48 said:

Thanks FD. Don't see much discussed lately about quantitative tightening (QT), whereby fed will be monthly selling off some of its bond portfolios. In Sept this QE will be DOUBLED in amounts by the fed. Heard one guru consider this QE is worth the effect of a 50 basis point minimum increase of the fed funds rate. If QE has major impact, longer duration bonds will be affected negatively. And fed may not tighten so much in September!

R48

The above is interesting but more academic.  If QT cause rates to go up, how come the market didn't anticipate it already by rates going up. In facts, 2-10 year rates are down in the last several weeks. I think that rates will creep up and right now bank loans seems to be the best risk/reward category.  I can justify it by the following too: these ST bonds with 2-4 months duration, get adjusted to rates pretty quickly, they lost a lot, default are not high, they are rebounding nicely, they are still HY bond but less risky than the "normal" longer term duration HY.

I also observed the following: ST rates went up higher faster than LT rates and why inversion of 2-10 got bigger.

In seriousness, I really don't care why.  If the big picture looks OK, I only care about the charts+uptrend that I see lately. Isn't great to just look at a simple chart and disregard all the theories?

[retiredat48]

FD, glad you have all this stuff under "PERFECT CONTROL."

But you stated: "...The above is interesting but more academic. If QT cause rates to go up, how come the market didn't anticipate it already by rates going up."

Same reason why the markets did not immediately price in the feds announcement at end of last year, that rates would be rising starting March, and go to maybe 3+%. Market slept until Jan, then quickly priced this in.

I think QE/QT is not only difficult for many to understand, but the effect is indeed unknown as it has never been undertaken before. Thus, many investors have a wait-and-see attitude.

But the fed knows, and will likely factor QE in if rate reaction is large. We will know it is large if longer maturity rates go up.

R48

[alvinthechipmunk]

Just for the record: still holding junk-bond fund TUHYX, through thick and thicker. 11% of portfolio. Reinvesting all profit, after stealing from it to fund a new position in TRP Equity Income. Bought at a good moment. Just recently. My YTD perf. in TUHYX tonight is down -12.11%. Smelly big doggy poopies, but at least I don't feel ambushed.