Oct

19

Bonds oh so close to major buy point.

Humbert H. writes:

I just keep rolling over T-bills because I don't know any better. Higher for longer or something. At least the interest pays for my recent losses trying to buy all kinds of value stocks at the lows, only to see them broken. That's OK, the next bull market will bail me out completely.

Laurel Kenner comments:

You are never free to deny the truth. You cannot make it up ad you go along.

I bow to Larry. The biggest gains occur in insane bear markets. Because the government has seized control of the bobd market, he is right, especislly leading up to an election. You all should heed him when he gives the buy sign. But it still stinks. I guess you need the nose for success.

Larry Williams replies:

Well lets hope I get this one right and earn those kind words - the ultimate sweet spot to buy is not here yet but it is coming.

Zubin Al Genubi adds:

When the time to buy comes, you won't want to. Like 17% bonds in the 80's.

Richard Bubb writes:

So is the FED [Powell & Co.& etc.] gonna raise the rate, or try the Higher-For-Longer road? Personally I'm thinking the HFL is their better option. Reason: The Fed is notorious for doing one too many rate 'adjustments' that would fix itself if they hit the pause button/s. Back to my 'raise concern'…I think the 2% target is a chimera and going there is an unwinnable move for the Fed.

Humbert H. assumes:

Well they can’t inflate the debt away fast enough at 2% nor is it easy for them to achieve so I’ll assume inflation will stay higher for longer.

Allen Gillespie writes:

While there is a strong seasonal trade that kicks end here around Oct. 19-23 - good till Christmas, such that even during bond bear markets the market held levels for a couple of month, the fundamental issues are the following.

1. Fed Funds Futures are beginning to project a cut in short rates around May 2024 which then continue through the first quarter of 2025 and reach down to a level of about 4.5%.

2. Historical, average spread relations therefore suggest we are seeing a Niederhoffer switch in here where short rates go into the 4-4.5% range and longer instruments up the the around of the current fed funds rates and budget deficit amount. A true switheroo.

3. There is a strong seasonal here (particularly Oct. 19-23) which held even during bond bear markets. IA flush after a weekend would seem about right. In the bond bear markets, however, the range was only good for a couple of month.

4. The long-term fundamental backdrop is the following:

According to the CBO, "since 1973, the annual deficit has averaged 3.6 percent of GDP. In CBO’s projections, deficits equal or exceed 5.5 percent of GDP in every year from 2024 to 2033."

This is the inflation rate - so, if you want a real return on bonds your rates needs to be higher than these levels. That is now just barely true in corporates, but it is not true for government bonds.

If you just charge the inflation rate, there is no real no real return available to bonds. Granted, in the long run government should be neutral offering neither gains nor confiscation, but at any moment they are on either side of that reality.

Today, the CBO projects the deficit will run 6.1% for the next two years. They do have a core adjusted for timing shifting of 3.4% - but do you trust them will all the war supplemental budgets.

Humbert H. responds:

A cut in short rates in May? We have high deficits, strong likelihood of inflation above 2%, no real signs of recession, "higher for longer" is seemingly the consensus of the mainstream economists, but fed fund futures are projecting a cut? Doesn't seem to make much sense.

Allen Gillespie replies:

Election years start getting discounted about Feb/March - so market may start looking past the Biden agenda and the housing season come May will be in the dumps. Forward oil also 10% lower for next year on economic weakness. Oil ran in 3Q because someone probably knew. The energy squeeze in 1973 was 1 year long. Exxon just bought Pioneer, so they can export LNG - trade seems to be setting up to be long domestic production for export.


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2 Comments so far

  1. zack on October 21, 2023 1:44 am

    Hi Allen, you are spot on about rates needing to be higher than interest rate level.

    Hi Humbert, i think its possible the cut in May prediction is due to people seeing a recession occurring in early-mid 2024- forcing feds to cut rates.
    That said, I agree that its possible we dont have one and we’ll see higher rates.

    Also, the CME Fedwatch had some bad predictions back before fed starting raising rates. maybe this is similar and yea it doesnt make much sense if fed wants inflation 2% they may raise higher.

  2. DEAN T PARISIAN on October 23, 2023 12:41 pm

    Is it the Ackman Top? I would rather call it the Larry Williams Top. Appreciate your work Mr. Williams.

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