'Bond King' Jeffrey Gundlach says buy long-dated Treasurys, with prices set to rebound going into a recession

"We like long-term treasury bonds for the short-term trade going into a recession. The 30-year US treasury yield downtrend of the past four decades has completely reversed, skyrocketing nearly 400bps in under two years," the "bond king" wrote in a Wednesday note. "There has been about a 50% drawdown in the long bond, which means there is now potential for the long bond to go up in price."

In Gundlach's view, one reason long-dated bond yields have jumped to 5% levels is the massive deluge of Treasury issuance, caused by the deferral of 2022 tax payments. But this—along with pandemic stimulus and loan payment moratoriums–is set to end.

"With debt and tax holidays ending, consumers will have to ramp down their lifestyles. This could be a positive for the bond market because we will not have so much net supply and perhaps a negative economic consequence that could potentially lead to a bond rally in the next six months or so," Gundlach wrote.

https://finance.yahoo.com/news/bond-king-jeffrey-gundlach-says-021451332.html

Interesting, yes??

Call it the mystery of the rising 10-year yield—and it’s led investors straight to the so-called ‘Treasury Term Premium.’

What’s the term premium? It’s a theoretical representation of the amount of extra yield investors are demanding to compensate for the risks associated with buying a 10-year long-term government bond rather than simply rolling over their bills for a decade. In other words, it’s not based on the expected level of inflation, but on the risk that comes with holding a longer-dated Treasury note or bond.

In fact, breakevens on Treasury inflation-protected securities, the amount investors are compensated for possible inflation, have remained virtually unchanged for months, a sign that inflation expectations are anchored. https://www.barrons.com/articles/treasury-bond-yields-term-premium-3ad3d39b?siteid=yhoof2

Look at US Treasury yields now:

U.S. Treasurys (10/19/23)

OK, I need someone to talk me off the ledge 😱. Yes I, Mr. Pizzaman, who advocates for 80% stock allocation in US index funds. I recently made a big purchase of Zero coupon US Treasuries annually laddered from 6 to 11 years in duration. See my Sept 28th post in the Asset Allocation thread. Why not get more longer term treasuries? Even if you assume that average general inflation will not go below 3% in the future (and not the 2% the Feds want), holding long term Zero coupon Treasuries to term (almost all present terms are very near 5% and most over 5%) seems like a no brainer and an option that may not present itself again for a long time. Guaranteed 2% real return on the bond portion of you asset allocation seems good enough to me. Thoughts???

Noise is Hiding a Tremendous Bond Market Opportunity

https://s.yimg.com/os/creatr-uploaded-images/2020-11/be27c700-2a45-11eb-bbd7-3133ae25e25 9" alt="Business Insider" data-src="https://s.yimg.com/ny/api/res/1.2/XuaW4GruGlN7_cmQM56oTQ--/YXBwaWQ9aGlnaGxhbmRlcjt3PTE1MjtoPTYwO2NmPXdlYnA-/ https://s.yimg.com/os/creatr-uploaded-images/2020-11/be27c700-2a45-11eb-bbd7-3133ae25e25 9" />

Treasury yields are surging. Here's what history says might come next for the bond market.

https://us.yahoo.com/finance/news/treasury-yields-surging-heres-history-203002620.html

"Our argument is that the current environment is more like the pre-2000s, in which Treasury bonds were an attractive alternative to equities, not just a safe haven in times of turmoil," Schon said. "History suggests that the yield that investors would be looking for would be somewhere between 1.9 and 2.1 times inflation expectations. The current 10-year breakeven rate of 2.45% would therefore imply a corresponding nominal yield of between 4.7% and 5.1%."

As for where the key bond yield heads next, history points to an answer there, too. There's a less than 1% probability, he says, that the 10-year Treasury yield climbs above 5.5% barring any significant revision higher in inflation expectations.

Vanguard bets on long-term US Treasuries after 'cruel summer' for bond investors

Vanguard said it expects interest rates will not be cut until at least mid-2024, and that bond yields will not return to the low levels that characterized the U.S. bond market in recent history.

But Vanguard said it also believes the Fed is at or near the end of its hiking cycle, which makes long-term bonds attractive both for their high yields and for the potential of capital appreciation in case of an economic slowdown.

"We believe we are in a new era for fixed income in which bonds offer significantly more value - both in total returns and as better ballast within an overall portfolio," Vanguard said.

https://finance.yahoo.com/news/vanguard-bets-long-term-us-161423832.html

Timing is the best for people that know the future.

Very good overview article on where bonds are now and how got here:

Most people tend to find the bond market a snoozefest – because fixed income is wrapped up in unnecessarily complicated jargon and tends to offer pitiful returns compared to other assets like stocks and real estate. But with mortgage costs and unemployment rates likely to rise, and equities primed to tumble, maybe it's time to start paying it a bit more attention.

https://finance.yahoo.com/news/bonds-record-breaking-crash-threat-192542620.html

Well, trying to time the market, at least in the short term, is for sure not a good idea 🤬 . But you have to base your decisions on something. For example, when major restructuring is occurring, ones that only happen once in a decade or two, you can take advantage. US Treasuries going sky high is one, allowing you to increase bond holdings with little to no risk (again assuming you hold to maturity), or when the stock market tanks (drops 20% or more) and goes on sale, when you can then utilize Roth conversions like I did in March 2020. My Roth conversion in 2020 and my major US Treasury buy a few weeks ago are the ONLY significant changes I have done in the past 5 years. Before that it was increasing my stock allocation in the 2010-2012 time period (big stock sale). Otherwise it's been holding on to what I got 😜, plus a little luck 😌 sprinkled in.

Seeking Alpha had an interesting article about "Fair Market Value" of US Treasuries:

The 10-year yield in September rose above 4% for the first time since 2008,
based on monthly data, which is used in our modeling. By contrast, the average fair value estimate was
essentially unchanged at 2.83%, slightly higher from the previous month.

Reviewing the market yield less fair value estimate emphasizes the extreme degree of divergence in recent
history. The September 10-year rate was 1.56 percentage point above the average fair value, the highest
spread since 1994.

Never say never, but the statistical odds look increasingly favorable for guesstimating that a yield peak is
near. In turn, that suggests it’s timely to lift allocations to bonds – especially if current weights are below
strategic targets.

Can someone explain what "Fair Market Value" means relative to US Treasuries??

More from Vanguard:

Vanguard said it sees strong long-term demand for U.S. government bonds and views 4.50% “as a fair-value level for 10-year Treasury rates.”

High-quality corporate bonds are “one of the most attractive places to be,” the firm said. Vanguard is overweight mortgage-backed securities and said the sector’s “high-quality credit profile, diversification, and liquidity are particularly attractive now.”

In the municipal bond market, Vanguard prefers longer-term investment-grade bonds.

“Many companies borrowed before the Fed’s hiking cycle began, strengthening their balance sheets,” Vanguard said. “In municipal bonds, valuations remain strong in longer-term investment-grade issues with ratings below AAA.”

As for high-yield bonds, Devereux said Vanguard is neutral “in the sense that we’re not overweight” and that while there are opportunities, investors have to be selective. Sara Devereux, global head of fixed income at Vanguard

How to buy US Treasuries:

TreasuryDirect.gov

This official government website is the central resource for any investor looking to purchase Treasurys electronically. Setting up an account only requires a Social Security number (or another form of tax identification), email address, and bank account information.

Once an account is active, investors can choose which asset to purchase, organized by the duration of the Treasury.

Shorter-term Treasurys like T-bills, while have a duration of less than a year, only pay interest at the security's mature date.

But long-dated Treasurys give investors a fixed interest payment every six months until the security matures (unless you get zero coupon bonds).

Once a security is selected, investors can choose how much of it they wish to buy, and the Treasurys are sold to them at the next auction. T-bill sales happen weekly, notes that mature in two to 10 years are sold are monthly, and bonds with 20- or 30-year durations are auctioned four times a year.

Treasury purchases can be reinvested automatically at the next auction, once the original asset matures.

Brokerages and banks

Buying bonds via on TreasuryDirect has a few drawbacks. For instance, holders can't sell their bonds directly from a TreasuryDirect account. Instead, they first have to be transferred to a broker or dealer.

In addition, the TreasuryDirect website only sells new Treasurys, and previously-issued bonds will not be found there.

For greater access to the Treasury market, investors can turn to brokerages and some commercial banks, which act as the primary intermediaries of US debt.

Though their services may come with a commission (no commission with Fidelity account) or require a minimum purchase amount ($1,000 at Fidelity), these dealers allow investors to participate in both Treasury auctions and the secondary market.

By using a broker to buy bonds in the secondary market, investors can also add Treasury assets into tax-free accounts, such as a Roth IRA.

Read the original article on Business Insider

More on US Treasury yield:

Morgan Stanley’s Guneet Dhingra also expects a slower pace of increase in coupons than in August primarily due to the rise in term premium, the added yield or return that investors are demanding to hold a long-term bond rather than short-term debt. The Treasury “might deliver a surprise relative to market expectations,” Dhingra wrote Tuesday.

To be sure, the term premium, although in the positive territory—at 0.38%—for the first time in more than two years, still looks low. The average during the five years before the 2007-2008 financial crisis was 1.22%.

Plus, changing the tempo would be going against the grain of being “regular and predictable” for the Treasury. Supply on any part of the curve typically leads to investors demanding more yield to buy that debt from the pool of choices. So if the Treasury is opportunistic and issues a larger-than-expected amount of 10-year Treasuries, say to lock in rates at today’s acceptable levels, yields on that part of the curve could shoot higher. In the case of higher T-bills and lower coupons, the yield on the shorter end could move higher, although the short end is more susceptible to interest-rate change.

“So there’s a balancing act, which I think they are going to have to figure out what they want to do or do cost-benefit analysis from that perspective,” said John Madziyire, head of U.S. Treasuries and TIPS at Vanguard Fixed Income Group.

https://www.barrons.com/articles/treasury-bond-market-quarterly-refunding-bee4bf23?siteid=yhoof2

Again, can someone explain how you come up with term premium %'s. I assume a positive % is good if you want to buy Treasuries.

What do Forum members think of Agency/GSE Bonds compared to US Treasuries? Does anyone use them in their retirement portfolios??

https://www.investopedia.com/articles/bonds/07/agency_bonds.asp

Is Investing In I Bonds Worth It Today?

Investing in I bonds may be losing its appeal at a time when yields on even the safest Treasurys are well above 5%, as the Fed has raised interest rates to the highest level in well over a decade.

Jonathan Swanburg of Houston-based financial planner TSA Wealth Management said in an email that I bonds were "interesting" back when their yields far exceeded those of short-term Treasurys, but they no longer offer such a premium. Yields on even the safest Treasurys have soared above 5% and now exceed those of I bonds, with the 1-year Treasury yielding more than 5.39% and 1-month Treasury bill offering returns above 5.5%.56

"Today's rate landscape has shifted and Treasurys offer much more attractive returns. I would encourage any investor interested in buying I bonds to consider other Treasury investments instead," Swanburg said.

Keil suggests alternative fixed-income investments such as certificates of deposit (CDs) or money market funds to generate higher returns over the next 1-2 years, especially given that you don't know what the return on I bonds would be next May.

Though Keil did say that you could consider I bonds if "you like your emergency fund savings to always beat inflation."

https://www.investopedia.com/treasury-announces-new-i-bonds-offering-more-than-5-for-next-six-months-8385040?hid=cf7663b321b1ba4c06f591c0f273ce622b2a3d21&did=10856371-20231031&utm_campaign=investopedia-daily-post_newsletter&utm_source=investopedia&utm_medium=email&utm_content=103123

This YouTube channel appears to have substantial content on explaining bond purchases and the associated rationale in a simple way:

https://www.youtube.com/@DiamondNestEgg/videos

This particular video recently discussed I-bonds: https://youtu.be/4BqTCPWVfpo?si=ISykvR4bzK10TD3l

In this case, they appear to suggest that they will wait for even higher rates for another purchase.