How to Capitalise on the UK and US Bond Markets Blood Bath of 2023
Interest-Rates / US Bonds Oct 10, 2023 - 10:24 PM GMTBy: Nadeem_Walayat
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STERLING
YES all currencies in free fall but for the time being at least the UK is showing relative strength against the dollar (dead cat bounce), it will eventually weaken once more to fresh lows. However as the above illustrates it is all smoke and mirrors, why I don't fuss too much over the fx rate that I buy US stocks at because at the end of the day CASH IS LOSING VALUE regardless of the currency it is denominated in! So it's a bit of a fools errand to wait for sterling to rise before buying US stocks as we have witnessed during the past 9 months.
Still to eek out that extra few percent it can be prove a useful short-term exercise to have a rough idea where sterling is going, one of the check boxes to tick off in our pursuit of maximising profits.
Stocks Bear Market Max PAIN - Trend Forecast Analysis to Dec 2023 - Part1
I would not be surprised if Sterling is above 1.30 by the end of 2023, with my central best guess being around $1.27 by late 2023. So I consider sterling today at $1.11 as being cheap in terms of the longer term outlook i.e. due a cyclical bull run within a secular bear market.
GBP peaked at $1.315 and then entered into a correction targeting $1.25 with probable overshoot towards $1.235, so about 2-3% worse than current £/$1.27 which thus should not prove much of a factor in terms of accumulating a dollar bond position. However sterling is still in a bull market so the correction is likely to resolve in a new bull market high beyond £/$1.315, against which 1.33 would be 5% better, thus if US bonds hold at current levels then would be 5% cheaper in sterling terms, so suggests better to accumulate gradually over a number of months though the opposite is true for UK bonds, i.e. to accumulate current sterling weakness, as rallying sterling would push downwards pressure on long rates.
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Investing in UK and US Bonds
And we arrive out our final destination, one of where doom and gloom prevails, most fear much higher BOND market interest rates! Where we have the likes of Bill Ackman literally announcing he is shorting US bonds AFTER they have fallen! Where were they a year go when that was the time to short bonds?
Just as 9 months ago we had clown Cramer declare that the FAANG's were DEAD, META at $100 was FINISHED that prompted patrons to ask me if they should sell their META and buy something else. I can't tell you what to do in the depths of draw down hell, all I can tell you what I am doing which was to buy more META! There is the weight of mass media, unsocial media, blogosfear, knownothingtoob, and twatter vs the metrics of good companies trading at deep deviations from their highs, all one can is to KEEP CALM and CARRY on BUYING AI Tech Stocks! What else can one do? Can't go off on a tangent against an avalanche of EXTREME FEAR MONGERING without end, virtually all of which will be forgotten some months later when stocks did the exact opposite of what almost everyone expected them to do,
Of course Ackman is puling a con trick on the general public by declaring he is shorting bonds because he probably shorted them in stealth mode many months ago and now wants the lemmings to jump onto the short trade so that he can exit his short positions at maximum profit, This is what you are exposing yourselves to when you watch the CNBC cartoon network!
Anyway the metrics say to expect lower long bond market interest rates as that is what the powers that be seek to manage their debt bubble, against which we have the screams of a bond market debt deflation apocalypse.
Yield Curves
At the late 2021 peak of the stock market the US short end yield was zero, long end (20 year) at about 2%. so the yield curve was normal. By the time of the bear market low was starting to invert, with the short end 3.5% vs long end 3.8%, fast forward to day we have the short end at 5.5%, Whilst most recent yield action has seen the short end and the long end nudge higher, hence offering an opportunity to accumulate near the bond markets lows.
In terms of price volatility one seeks the longer end i.e. 10year and 20 year, as the short dated bond funds are not going to be volatile enough in terms of price, whilst there may be some that have been but that would be as a function of fund manager incompetence so unlikely to see any recovery.
The bottom line is that as we have seen over the past month (green vs blue) US yields should continue to nudge higher across the curve and thus allow one to accumulate as bond prices drift lower. We will only know the yield junctures with the benefit of hindsight but given the amount of debt that the US accruing I doubt we are going to see the 30 year rise from 4.21% to 5.5% as Ackman espouses.
Whilst the UK is forced to play follow the Fed lower despite having a much weaker economy that lends it self to earlier and deeper cut in yields, in fact the UK yield curve is already showing strong signs of responding to this which is why I have been iterating target bond funds for some weeks. For instance back in October 2022 as soon as I saw that Bond market was collapsing I tried to buy GILTS both via II.co.uk and AJ Bell and neither would let any orders go through, the market had effectively been frozen. Though I am sure it would have been possible to buy bond funds at the time had I then taken the time to look deeper into bonds.
So the range of target bonds are UK and US 10 year and 20yr.
IBTM.L
IBTL.L
GILTL
3GIL
Why did I pick these bond funds listed on the LSE, primarily because they can be bought within tax free wrappers such as ISA's and SIPPs, yes I know GILTS are free of capital gains tax but I don't want to invest in individual illiquid bonds. Still GILTS can prove useful for UK investors OUTSIDE of tax free wrappers.
Bottom line rates have been capped by Fed Wizard of Oz via smoke and mirrors such as the reverse repo balance that is now being drawn on to depress yields as the US treasury floods the markets with over $1 trillion of bonds over the coming months, soon to be accompanied by QE to suppress the yield curve which is why all those fantasising about yields soaring to the likes of the late 1970's are going to be proven wrong. The higher the debt burden the lower the yield! Ackman says 30 year yield will trade to 5.5%, more like 3.5% if not lower!
And then there is the SAFE HAVEN element of US bonds and UK bonds to a lesser degree, everyone appears to have forgotten that there is a banking crisis underway which is why the Fed reversed QT in March and effectively announced a blanket guarantee for all depositors regardless of size to prevent a run on the banks!This is the problem with the banking crime syndicate and is a function of the quadrillion derivatives market where bets are piled on top of best piled on top of bets, we don't know where the problem is until the banks start to implode! The banks gamble and then lose and the Tax payer steps in to bail them out resulting in perpetual counter party risk that encourages fund flows into the safest asset, US bonds. Though cash flow rich AI tech stocks as we have witnessed this year are also a safe haven!
Government bonds are a safe haven and given that we are heading into a recession, and given that rates are high, hence yields should drop. Of course as occurred September 2022, there is the risk of volatility in bond markets as well. There in lies the risk vs reward, there cannot be the potential for a 50% reward without any risk, if can not stomach any risk then just park your funds in a money market account and let inflation erode it's value,
Thus as I have already mentioned for several weeks I settled on these 4 bond funds that offer varying risk vs reward over a 2-4 year time frame. Yes it will have to be bond funds rather than actual bonds which tend to be illiquid, 2 UK bond funds and 2 US bond funds that as combined portfolio I seek a 50% return from over 2-4 years, which is pretty good considering these are bonds and not stocks!1
IBTM.L £135.8 - US Treasury 7-10Yr - US Equiv - IEF $95
This bond fund is down 29% from it's high with potential upside target of £175 for a 27% gain over a target 2-4 years, so a lower / risk lower return component of the portfolio. I've been accumulating since £139 with limit orders ever £1 lower, as well as timed based buys.
IBTL.L $279- US Treasury 20+yr - US Equiv TLT ETF
Peaked at $523, collapsed to it's recent low of near 50% to $276, imagine all those who swallowed the financial advisors and media sales pitch to be 60% in bonds because they are 'lower risk' then stocks! This is HORRIFIC! MORE THAN DOUBLE THE RISK FOR A FRACTION OF THE RETURN OF STOCKS! HORRIFIC! Still it gives a higher volatility potential to accumulate into right now. Potential upside over 2-4 years is for $422 for a 52% on the current price!
UK BONDS
GLTL.L - £39 - UK Gilts 15+Yr
UK bonds have been obliterated, portfolios built up in bond funds over the past 10 years have been wiped out! Now you know why I have avoided bonds. Pittance in return during their bull market followed by a spectacular collapse, all whilst the lemmings encouraged stock investors to seek safety in bonds! This bond fund has COLLAPSED BY 60% off its high of £82! Imagine those who had parked the bulk of their cash in such funds by following the advice of FA's! Only discovering the catastrophe when they get their annual statements, A lot of TV's will have had remotes thrown at them! This is why there is no FREE LUNCH! It is YOUR MONEY it is upto YOU to DO THE WORK and understand what you are invested in else PAY THE PRICE of a 60% wipeout in what is supposed to be an ultra safe low volatility asset! When the exact opposite is true! If you lost similar on UK bonds then it's your fault for being LAZY! DO THE WORK!
Anyway bond market collapse breeds opportunity and I have been accumulating sub £40, yes it could spike lower, it could revisit £35 or even go lower, but we will only know for sure in hindsight, without which I am focused on accumulating under £40 with limit orders ranging down to £30. Upside potential is first £60 and then £65 for a potential 55% to 65% return over 2-4 years.
3GIL.L - £72.5 - 10 Year X3 Leveraged
The higher risk component for this mini bonds portfolio, one that is suited to scaling in and out (trimming), Already accumulating at £68 and trimming at £78 has yielded a 15% return which is my strategy for this leveraged bond fund, accumulate during the dips that could potentially trade down to £60 for distributing during the rallies that target £100, that's a 66% spread! Where even a fraction of which could deliver 30%. For buy and hold the target would be £100 for 42% off £70 and £133 for 90%. In terms of percent of this mini bond portfolio I would not go over about 15%, even though I am personally tempted to do so, it is levered so higher risk.
Remember to keep things in perspective, bonds are a trade / side salad, meat and potatoes are -
1. Housing
2. Stocks
So don't get carried away with bonds.
Talking about housing, during 2022 clown Burry amongst many others and clueless utoobers were warning of a housing crash on par with that of 2008 prompting comments from patrons in response to which I did the UK housing and interim US housing article to calm the brewing panic continuing into recent articles of a few weeks ago that UK and US house prices
will be HIGHER a year from now then where they stand today, so good luck to those waiting for a crash to buy! It ain' t coming any time soon, and probably not for the remainder of this decade! Which just goes to show how dangerous MSM truly is as a consequence of the PERMA FEAR that it peddles. MSM IS DANGEROUS, Journalists and academics are vested interests in theories that just do not work!
Whilst stocks have soared to become expensive, hence due a correction. However there are pockets of value out there such as the Chinese tech giants, as ALibaba illustrates, there is a floor under this stock, coupled with good metrics eventually Alibaba is going to trade to new all time highs! So very little downside risk coupled with huge upside potential. I am 137% invested, what I need to ensure not to trim too much too early, similar for Tencent 124% and Bidu 110%. I recall clueless Cathy wood sold completely out China near the bear market bottom. Bottom line we got the potential for a good bull run over the next 2 to 3 years.
(Charts courtesy of stockcharts.com)
The only thing that counts are the mega-trends, of which INFLATION is primary!
Instead turn on MSM and you hear tripe of disinflation, falling prices, risk of DEFLATION! it's SO MORONIC! The exact polar opposite to REALITY! The great irony of investing is that most investors don't buy when CHEAP instead they FOMO buy when expensive! And I know I am going to hear contrary arguments in the comments but Nadeem this analist or that analyst said x,y,z so how can Bonds ????
What else is hated right now that most are too afraid to accumulate?
REITS! There are two in my mini US housing portfolio.
AI Stocks Portfolio
Portfolio 77.5% invested, 22.5% cash, so positioned to accumulate during the correction.
https://docs.google.com/spreadsheets/d/13gDntQuyDP3db7WqEvOXftOxVVTJyYyB_s-O0XW2EIk/edit?usp=sharing
Taiwan's Doomsday Weapon Against China
And no this has nothing to do with semiconductors. We all know that Taiwan has spent the past 50 years preparing for a CCP invasion, armed to the teeth with latest weapons that would exact a heavy price on China should Emperor Xi seek to permanently cement his name in history by taking Taiwan and opening the Pacific to the Chinese fleet. An assault on Taiwan would prove hugely costly in terms of destroyed lives and military hardware. However given the weight resources that China can bring to bear it would only be a question of time before China took Taiwan with or without US committing forces, not unless the US is willing to sacrifice it's entire Pacific fleet in the defence of Taiwan.
However, the current floods ravaging China, collapsing many bridges, killing many thousands of people that includes flooding of Tiananmen Square has prompted me to investigate a potential doomsday scenario that Taiwan could deploy against China, and I mean literal doomsday that would be on par with the use of over a dozen nuclear weapons! Which would be to BLOW-UP the 3 Gorges Dam that would unleash a destructive flood onto the cities of central and eastern China effecting over 400 million people, destroying much infrastructure and killing many tens of millions of people and that would instantly cripple China's economy and war machine as the nation would be thrown into total chaos in attempts to deal with the catastrophe thus leaving Taiwan to successfully defend itself. However it would be doomsday for Taiwan as China faced with such a catastrophe on par with what it would experience during a nuclear war would likely retaliate with the use of nuclear weapons against Taiwan.
Thus Taiwan has a doomsday weapon one of mutually assuring the destruction of both China and Taiwan and thus will increasingly factor into Taiwanese military doctrine to deter a Chinese attack. The problem though is that Emperor's tend to be surrounded by Yes men who only tell the emperor what he wants to hear, much as Czar Putin ahead of the Ukraine invasion that it would all be over in just 3 days! The risk is the same in a war between China and Taiwan that Emperor Ping completely misses huge risks to China.
All Taiwan needs is a battery of several hundred cruise missiles that are able to reach the three Gorges Dam, and as we have seen with Ukraine there is no defence against Supersonic missiles. Whilst China is going to have to build a lot more subs given the number that were washed up during the recent flood.
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Your trimmed the FOMO to buy the Dip analyst.
By Nadeem Walayat
Copyright © 2005-2023 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.
Nadeem Walayat has over 30 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.
Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.
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