Bondmageddon: Don’t Fight the Curve

[music] Hi and welcome back to channel 11. I'm your host Ken Shenoda. Today's Tuesday, October 6. Title of today's show is bond mageddon because we've had a pretty ugly bond market out there. It's been somewhat of a bloodbath, especially in longer duration bonds. Let's start off with the land of gains. Equities making a new high here or looks like a new high 7831. a lot of 8,000 calls out there from the street. We'll see if we get there by the end of the year. It's been narrow breath though. It's uh basically a few names taking us up there. Here we can see year to date um energy infoch momentum still leading the way growth. Pretty solid returns for the S&P 500 up almost 15%. On the far right we can see the lagards with uh flattening of the yield curve. Financials doing poorly with the uh rise in rates. Real estate getting hit uh in September, still up year to date. Uh basically banks flat on the year, consumer discretionary down, utilities down as the lower-end consumer is getting hit. Utilities are kind of bond-like as well, getting hit with higher rates. Looking across uh different markets across the globe, we see a good year for EM up 24%. NK up 42%. Uh small caps posted a comeback up 15. NASDAQ up making a new high too this week up almost 20. Um the lagards Europe that doesn't have a lot of tech. Europe also getting hit more by energy prices and diesel. You can see the foot seed lagger as well up eight and a half and the Dow Jones Industrial on the far right with no tech up eight. Mag 7 really helping to drive equity returns up uh making new highs here on the MAG 7 after kind of going sideways for uh six to eight months. we could see uh uh this is kind of where you see the breath come into play. The S&P 500 index which is market value weighted is now uh has really outperformed the equal weight because a lot of the stocks underneath the leaders um are actually down I think I saw that uh uh most stocks in the S&P are uh about 15 to 18% below their 52- week highs. So you've seen kind of a sell-off underneath and then the MAG7 bringing the market up. And here's a chart that shows that this is kind of a market breath chart calculated as a difference between the aggregate index and median stock, right? And so it's kind of that equal weight versus the uh doesn't perfectly capture it, but here you can see that the breath is really the lowest it's been since uh uh 99 early 2000s. So we'll see. Um either the stuff leading the way rolls over or you can see a catch-up trade. I think a lot of it's just going to be on how earnings come through. Market cap versus equal weight. Uh here you can see at the bottom was the MAG 7 was lagging uh through the summer and that's made that huge comeback that's helped lead the S&P to new highs and uh you can see some of the the equal weight stuff rolling over uh and that shows you that breath that's really weakened the marketplace. All right, let's take a look at crypto. Uh crypto has been doing well recently. Bitcoin back up to 86,000 nowhere close to its 120k highs. Ethereum also making it come back. Even uh dogecoin little deadcap bounce. Um Salana as well uh seeing a little pop here. So we've seen a return to speculative fervor in the crypto markets. Gold uh has not done well with rising rates. Kind of hanging in at this kind of 4,000 area after that pop up to about 4,600. uh silver kind of behaving similarly sitting around that $60 range and um yeah I I think as long as rates are going higher and we're fighting inflation then I think it's hard for gold to advance. It's also had a huge runup through 2024 2025. semiconductors and software on the lefth hand side is looking at uh semiconductors versus the S&P and the S&P has been had been doing well and the semiconductors had that sell off we saw but that's making a comeback and then on the right hand side you can see software also making a comeback off the lows after being beaten down and we talked about this might be an interesting time to add some names there of companies that um you know we still need the sales force of the world and cyber security perhaps And I think a lot of those names have made a comeback. We're seeing that also in the credit markets that some of the bank loans that got hit back by some of the software names are making a comeback too. Uh here are those software names that we'll see the ones that are doing better than others. Salesforce pretty big rally off the lows been selling off more recently. Service Now um also uh big rally off for Lowe's into it lagging there and Adobe kind of lagging. Salesforce as well. international equities that Nikkay that's one of the best performing markets out there you can see the footsie kind of going sideways stock 600 Europe kind of going sideways as well still positive on the year but nothing like the Nikk and EM which was up over 20%. One thing to just know about EM is that the EM index has a lot of uh tech in it uh that those are the names that are leading the charge. It makes up a large component of that that index. So you may not be getting the diversification you think you are um away from your S&P that has a lot of tech in it as well when you go to that EM index. So might be interesting to look at uh local uh uh local currency uh funds that you get more direct currency exposure and a pretty high yield right now. Europe versus S&P. Europe is lagging because of uh what we talked about earlier because of the uh it doesn't have as much tech and energy uh more energy sensitive and with energy prices up it's it's lagging there. Also dollar index uh making it in a new high for you know last 12 months or so up at 102 with uh higher rates helping the dollar might be an interesting uh uh chance to buy non-doll exposure given the dollar rally. Euro is weaker here down to that 1.1 level. Seems like that is a pretty big inflection point. So I think we might see the euro hold here. yen intervention going on been uh bouncing out got big intervention at that one kind of almost 160 level and uh now we're here at 150 I guess it was more like 165 when that invent intervention happened. So yeah, uh, you know, there's a big story about if one day all the people that have high savings in Japan that have been looking elsewhere for yields because yields are so low in Japan and and the the carry trade was going on, they also buy in other equity markets. If that money ever comes back home, um, you know, it might go into Japanese bonds, but as it the money comes back, it's going to buy yen. And so that could be the case for a big yen rally somewhere down the line. Not saying that's imminent, but that's a an interesting story that's out there one should read up on and and have in the back of their mind. In the meantime, um you a lot of growth there and equities have been doing well. Commodity index just on an absolute tear, taken out that 2022 high, had a bit of a pullback. Um that was basically the hope that the war was over in the Middle East and then we've ripped higher. A lot of the index is energy and so that's definitely one of the reasons it's up a lot. just huge rally in commodities. Doesn't make you feel good about inflation when you see commodities up that high. Uh on the left hand side up over 100% energy, Brett crude, crude oil, copper up 20 makes it look like it's not up a lot because of the scale. Uh and then on the far right you can see those precious metal metals kind of lagging. Also food prices is up because of energy costs. So agricultural uh commodities up almost 15%. does not look like we're in a recession. Manufacturing is on fire because of the capex spend from the hyperscalers building data centers everywhere and uh services PMI also strong consumer continue to spend. I have a good friend whose family is in concrete pumping. It's the total opposite of being a bond manager. Um, but I was a good friend of mine, hadn't seen him in a long time, and he was uh saying that, you know, they don't have much data center business in California cuz California is super anti- business uh data centers. But, uh, he wanted to buy a concrete pump. These things are pretty expensive. It's like a million and a half dollar type capital investment, but their colleagues that are in other places like Texas and Louisiana where there's building a big uh some big sus, they're buying 20 20 new pumps. That's how you get uh um some of these uh uh price indices that's that they skyrocket because that's the kind of uh demand increase that happens when you get this this huge capex thing going out there. So there's there's just a boots on the ground example of what the data center buildout is doing and I would think you'd see some inflation in the prices of those those big concrete pumps. All right, global manufacturing PMI now uh even China has ticked right at that 50 level. So we're in expansionary territory almost everywhere. Same with services. China finally tick up over 50. Germany also now up there. Um so you got a lot of fiscal spending. You got a lot of stimulus going on. You got capex going on. Here's Atlanta GDP now. Um down at uh up at 367 down off the highs. So strongly quite strong for the forecast of future GDP. retail sales saw uh continued strength in retail sales out there as well and uh that's helping to drive um I think the performance in some of these equity markets. So it's hard to see uh credit spreads widen when earnings are strong, consumer spending keeps going and there's high nominal growth. That's why corporate bond spreads are so tight. Now, on the back of all that growth, um, comes with inflation and concerns about inflation and the Fed kind of hike. And here we are. We've seen this huge back up in rates. The 2-year up over 100 basis points. The 5-year in April was down sub 375, up 5%. Pretty remarkable. And, uh, levels on the long end that we haven't seen since the early 2000s. 10 year Treasury, 530, 30-year Treasury, 570. I mean, I I I I feel like um we've had a big sell-off, but with nominal growth this high, um you know, I I can make a case for long-term rates to be higher. I I think the two-year is pricing in, you know, basically three hikes now um by the Fed. And is that enough term premium? Do you want you want at least 100 basis points of uh yield premium the on the 10-year from the two-year? So, um, there are some people calling for flattening, but I I feel like if we're not going into recession, are you getting paid enough to go out the yield curve? You can get pretty attractive yields in short duration paper. So, that's where I think we're seeing most interest from clients right now is staying short. Maybe dabble in some munis given how high yields have gone, but 230s big steepening recently. Um, pretty volatile. I think it's going back to 100 at least. So, let's keep our eyes out on that. Um, we've had uh some steepening steepeners on and some plans that hurt earlier this year. It's starting to work again. Inflation break evens remain uh pretty muted. The two years up obviously with the uh uh energy prices, but still got a two- handle. So, we're nowhere back towards kind of um the spike in late 2025 and of course that big spike in inflation expectations in 2022 before it started hiking rates. So market thinks uh uh the Fed is going to do going to do what it needs to do to keep things contained here. Um but really real yields with nominal yields going up and break evens remaining relatively muted real yields are on the rise. All right fixed income unless you're floating rate September was not a good month. Levered loans slight positive returns clo some of the best returns out there. floating rate uh you R&B CRTM2 it's kind of a really uh bespoke part of the market or a small part of the market those are floating rate R&Bs bonds and then big negative returns for longer fixed rate paper treasuries uh down two down three when I say big big relative to the bond market uh but nowhere close to the uh the bondageddon or bond apocalypse of 2022 that's because we have um yield. So yield helps total return. This is year-to- date total returns. Even with the big rise in rates, uh treasuries only down 2.8. You go recall back in 2022 when you had yields of one on treasuries, uh you had doubledigit down uh performance in some of those sectors. What a mixed bag. Um floating range stuff doing well, shorter duration fixed rate rough stuff doing okay, barely eking out a positive return. And then you've got like triple C high yield down 3.4% triple C lever loan. So um the market dinging the riskiest parts of the market. IG spreads are tight. This is mainly a duration move on IG. Um triple B CLO's top performer on this chart and the A down 2.9 2026. All right. Spreads leaking a little bit wider. Securiz stuff a little bit tighter, but that's good. If if if um corporate spreads stay wide, eventually the stuff will kind of play catch-up and widen too. But high yield is has widened the most at its tights. It was near 250, now back up to like a three handle in the 300s. Um and all in yields looking pretty interesting. Another thing to keep your eye out on is uh Europe. We we go back we don't have it on this chart but maybe some of you weren't even working yet but there was a big European sovereign crisis in 20112 with Greece and we called it the pigs back then it was Portugal Italy Greece and Spain uh basically southern Europe people worried about defaults there um now it's France so you can see French uh spread to German buns is 127 that's the widest it's been actually since 2011 12 we should have put that on this chart, we only went back 10 years. If we went back 20, we would have included uh what seems like a long time ago, but um and there's a lot of civil unrest in France right now. There's protests and uh people starting fires and stuff. So um you know, they just need to get their fiscal um book in shape. And unlike the US, their nominal GDP is pretty low. I think it's like 2%. So they can't grow their way out of their problem. So keep an eye on this. This is a macro risk that's out there. And whenever you see this hockey stick move up, um it's not really a good sign. So, uh even though earnings are strong, we got all this capex going on in the US which is propelling growth. Um something like this is also need to keep an eye on it. All right, here's spreads. You can see uh IG barely wider, high yield, got back out to three handle. Another interesting story is uh what's happening with some of these tech names. So on the very bottom we've got Microsoft which is one of the only AAA rated bonds out there. Triple u them and Johnson and Johnson really tight spread 30 over treasuries. The corporate bond index itself is in the light blue. That's spread that shows a spread of 81 um through October 5th. And Microsoft trades through that because most of the IG index is single Ale B. Uh you can see Alphabet formerly known as Google uh trades just inside of the corporate bond index for 67. Got Meta which is uh 96 spread just inside the corporate bond tripleB index which is the green dotted line. So you get paid more spread the more risk you take. If you have the index you got more single A's. If you just triple B's get paid a little bit more spread. And then moving up you see double B high yield with the recent widening. You can see that also in the top shaded red uh which is single bees both moved up. So high yield spreads have been widening and then uh then we have SpaceX and Oracle and uh before this move in high yield they were trading wide of the double B index. So basically the the bond market these are tripleB names both SpaceX and Oracle. So market's saying, "Hey, these guys are levered up. These aren't really uh investment grade names. These are really uh below investment grade credits. U but these companies, I don't think they care. They just want to borrow money." And a spread of 200 in the big scheme of things relative to their what they think their return on investment is going to be might be cheap capital. But again, I I think something interesting to watch when you see this divergence happening in the bond market. What looks cheap, mortgages look cheap. uh especially R&Bs AAA's um you can see corporates down at the bottom on the rich side. EM corporates really really rich and uh high yield's gotten a little cheaper. High yield was down at the bottom. Um and that's uh not quite to average but definitely looking better. Also short IG look a little bit better. Um a lot of the securitiz stuff is short. That's why we think some of the more interesting places to hide out is in short high quality securit ties where you can get paid 120 150 over um short treasuries or floating rate sofur and get a nice yield without a lot of risk and not worry about what's going on with the long end. Yields yields are near the highest levels that we've seen um in a very long time especially on high quality fixed income paper spreads have been wider for brief moments. So that's when you go to markets like high yield uh or levered loans. Um you know when we got to 22 23 we had a moment where yields were high on treasuries and also spreads gapped out 5600 plus on high yield. So you could you could have bought high yield at a wider uh spread higher yield. Also this throws in I believe COVID because this goes through December 31st 2011. And so some of these yields just have to do with COVID. But, um, you know, I think while spreads in some sectors aren't the widest they've ever been, all-in yields on fixed income definitely are starting to look attractive. And you don't have to go and buy long duration. You can stick to shorter duration. You can stick to uh uh high quality and get kind of like that 5 and a half 6%. You can mix in a little bit of high yield and bank loans selectively. You got to do security selection. Here's another view of it. fixed income rank from a percentile. This kind of throws out those crazy yield levels you see for like a week like in March of 2020. And here you can see uh from a percentile rank back through December 31st, 2011. And the reason we picked that date has to do with some of these indices don't go back prior to that. And yields uh from a percentile rank standpoint looking pretty cheap. So time to maybe take a look at fixed income. Don't have to uh go for the long long duration. Obviously, it's a better buying point than it has been in a long time, but as we talked about earlier, I do think the curve could steepen a little bit more here. Um, but you know, some volatility out there, some interesting times, more interesting things to talk about. Good luck out there and uh hope everyone enjoyed the summer. Been a heat wave out here in LA, so we're just trying to stay cool, just like the markets. >> [music] [music]