Excellent summation. I bought a lot of TLT and long Treasurys, years ago, when I was putting together a "Permanent Portfolio" a la Harry Browne. Now I am replacing them with highly rated corporate bonds, because I think there is something inherently dishonest about a bond that is as long as 30 years, especially a government bond. The only way these are "risk-free" is because the government is planning on collecting taxes from producers, with which to pay you back, in 30 years- so they are depending on the producers that they are effectively mugging. (Yes, I came to this conclusion after a re-read of Atlas Shrugged).
A bank CD (which seems like effectively a "bond" issued from a bank?) almost always has a duration of 10 years or less, and a corporate bond (without government backing) is rarely more than 20 years, often shorter. Also, a corporate bond is issued by an entity that is actually productive themselves- instead of just stealing from productive people like government bonds!
Anyway, I would be curious to hear your thoughts on this, Jim- if this makes sense or I am missing something.
If you owned TLT before March of 2020, when interest rates hit a 5000-year (not a typo!) low, congratulations, you did great, as the bonds you owned (via TLT) appreciated nearly every year. One reason I don't own long-term bonds, whether government or otherwise, is that I believe bond yields exhibit significant secular patterns (for reasons I don't fully understand). It seems likely that we have embarked on a long-term upward trend in yields, which is not great for bond prices. I certainly agree that a 30-year bond, when not backed by a 30-year asset, is disingenuous. Only the government has the chutzpah to issue them. As you say, corporate bonds are generally listed for 20 years or less (usually much less), and they contain various provisions for early redemption, so typically you are buying a duration much less than 10 years. That is all to the good as far as interest rate risk goes. One thing I'd remind you of is that corporate bond rates are typically priced as a spread over the 10-year Treasury rate. Therefore, if the 10-year Treasury is being manipulated or is temporarily low, it could impart a false signal to the corporate bond market. Mileage will vary, of course - many individual corporate bonds are great investments, kind of like individual stocks. As Jim Grant likes to remind us, there are no bad bonds, just bad yields. In other words, the price of the bond is everything. Thanks very much for the comment!
Good article as always although I don't have as favorable a view of Scott Bessent as you seem to have (or have had?) What is your view of corporate bonds/bond funds/ETFs (short, intermediate, long, mix) as an alternative to T-bills?
Hey Anders - thanks for the comments! My view on Scott Bessent is one of strong respect within the context of the impossible job he has volunteered to do. There is a great story of Bessent as a young, openly gay man. He was selected to attend the Naval Academy during the time of "don't ask, don't tell." All he had to do was not state his sexual orientation, and he would have been admitted. However, he thought it was dishonest to hide such a fundamental aspect of his life, so he declined. Many years later, given an opportunity to serve his country in an era when practically no one cared about sexual preference, he was happy to seize the opportunity. Listening to his interviews, I judge him as a sincere and honest man. Having said that, there is no doubt in my mind he will have to implement inflationary policies to pay the bills and "buy time" until the country is better able to face its impossible debt situation. So I admire Bessent - in context, and from a distance - as the best man available to face a near impossible task.
Regarding your practical bond question, yes, I do think the ETFs from the big investment banks are a good way to earn a decent return while avoiding interest rate risk and keeping powder dry for other opportunities. (For example, I own BIL and BILS in some accounts, and I roll actual T-bills in other accounts.) As I have mentioned elsewhere, I do not like long-term bonds or bond funds because their return is too low compared to the risk of rising interest rates. Intermediate-term bonds and funds (3 to 5 years in duration) pose a fairly small interest rate risk, but I don't feel you are being compensated for inflation risk. Longer-term bonds (>5 years duration) are a non-starter in my view because of inflation risk.
I should emphasize something I have said before. I am not an expert bond trader. If I thought I could anticipate medium or long-term interest rate movements, I would "trade" in and out of longer-term bonds. Some people can do this successfully, but not me. My view is: If I am going to buy a long-term bond, I must be willing to hold it for the entire term of issue. So the question for me is, what return do I need to feel comfortable buying, say, a 10-year Treasury bond? For me, that return is 10-12 percent. Mind you, that is just my judgment; others' mileage may vary.
On the question of corporate and high-yield bonds, just a brief comment. Their value varies from issue to issue because their creditworthiness varies with the issuer. Currently, the yield spreads between corporates/high-yield bonds and Treasuries are very narrow. I will be very willing to buy high-yield (equity-like) bonds in a diversified fund when the yield spreads over Treasuries widen, thus offering a greater reward for the risk. Cheers!
This podcast was GREAT. HIGHLY informative. I sent it to several people. I also loved your line that Republicans talk like libertarians but spend like Democrats. So true!
One side note... you emphasize individual stocks as part of the portfolio and suggest the banking sector as terrain with potential wind at your back. I'm sure you saw Lynn Alden's May 11 deep dive on US Bancorp.
Perhaps your viewership base is much more sophisticated than me and therefore this comment doesn't apply to them. With that caveat...
I would LOVE to see you screencast yourself looking at a stock like US Bancorp: what websites you use to examine it, what are the primary markers you review, how much math do you employ and what type of math, and how ultimately do you grapple with good buy, bad buy, or not enough information to make an informed decision -- the Jim Brown equivalent of Munger's Remedial Worldly Wisdom.
Thanks for that vote of confidence! As I mentioned, bank stocks are tricky because their assets are pretty opaque even though they fully adhere to legal disclosure standards. I would trust Lyn Alden's judgment on buying bank names, because I believe she and her people do the work, as long as the individual name was conservatively sized in a portfolio. Because of the opacity of the banks' earning assets, I have learned that employee culture, which comes from years of good management and leadership, are very important considerations in evaluating banks. I'll consider that idea of stepping through a stock evaluation.
Excellent summation. I bought a lot of TLT and long Treasurys, years ago, when I was putting together a "Permanent Portfolio" a la Harry Browne. Now I am replacing them with highly rated corporate bonds, because I think there is something inherently dishonest about a bond that is as long as 30 years, especially a government bond. The only way these are "risk-free" is because the government is planning on collecting taxes from producers, with which to pay you back, in 30 years- so they are depending on the producers that they are effectively mugging. (Yes, I came to this conclusion after a re-read of Atlas Shrugged).
A bank CD (which seems like effectively a "bond" issued from a bank?) almost always has a duration of 10 years or less, and a corporate bond (without government backing) is rarely more than 20 years, often shorter. Also, a corporate bond is issued by an entity that is actually productive themselves- instead of just stealing from productive people like government bonds!
Anyway, I would be curious to hear your thoughts on this, Jim- if this makes sense or I am missing something.
If you owned TLT before March of 2020, when interest rates hit a 5000-year (not a typo!) low, congratulations, you did great, as the bonds you owned (via TLT) appreciated nearly every year. One reason I don't own long-term bonds, whether government or otherwise, is that I believe bond yields exhibit significant secular patterns (for reasons I don't fully understand). It seems likely that we have embarked on a long-term upward trend in yields, which is not great for bond prices. I certainly agree that a 30-year bond, when not backed by a 30-year asset, is disingenuous. Only the government has the chutzpah to issue them. As you say, corporate bonds are generally listed for 20 years or less (usually much less), and they contain various provisions for early redemption, so typically you are buying a duration much less than 10 years. That is all to the good as far as interest rate risk goes. One thing I'd remind you of is that corporate bond rates are typically priced as a spread over the 10-year Treasury rate. Therefore, if the 10-year Treasury is being manipulated or is temporarily low, it could impart a false signal to the corporate bond market. Mileage will vary, of course - many individual corporate bonds are great investments, kind of like individual stocks. As Jim Grant likes to remind us, there are no bad bonds, just bad yields. In other words, the price of the bond is everything. Thanks very much for the comment!
Hi Jim,
Good article as always although I don't have as favorable a view of Scott Bessent as you seem to have (or have had?) What is your view of corporate bonds/bond funds/ETFs (short, intermediate, long, mix) as an alternative to T-bills?
Hey Anders - thanks for the comments! My view on Scott Bessent is one of strong respect within the context of the impossible job he has volunteered to do. There is a great story of Bessent as a young, openly gay man. He was selected to attend the Naval Academy during the time of "don't ask, don't tell." All he had to do was not state his sexual orientation, and he would have been admitted. However, he thought it was dishonest to hide such a fundamental aspect of his life, so he declined. Many years later, given an opportunity to serve his country in an era when practically no one cared about sexual preference, he was happy to seize the opportunity. Listening to his interviews, I judge him as a sincere and honest man. Having said that, there is no doubt in my mind he will have to implement inflationary policies to pay the bills and "buy time" until the country is better able to face its impossible debt situation. So I admire Bessent - in context, and from a distance - as the best man available to face a near impossible task.
Regarding your practical bond question, yes, I do think the ETFs from the big investment banks are a good way to earn a decent return while avoiding interest rate risk and keeping powder dry for other opportunities. (For example, I own BIL and BILS in some accounts, and I roll actual T-bills in other accounts.) As I have mentioned elsewhere, I do not like long-term bonds or bond funds because their return is too low compared to the risk of rising interest rates. Intermediate-term bonds and funds (3 to 5 years in duration) pose a fairly small interest rate risk, but I don't feel you are being compensated for inflation risk. Longer-term bonds (>5 years duration) are a non-starter in my view because of inflation risk.
I should emphasize something I have said before. I am not an expert bond trader. If I thought I could anticipate medium or long-term interest rate movements, I would "trade" in and out of longer-term bonds. Some people can do this successfully, but not me. My view is: If I am going to buy a long-term bond, I must be willing to hold it for the entire term of issue. So the question for me is, what return do I need to feel comfortable buying, say, a 10-year Treasury bond? For me, that return is 10-12 percent. Mind you, that is just my judgment; others' mileage may vary.
On the question of corporate and high-yield bonds, just a brief comment. Their value varies from issue to issue because their creditworthiness varies with the issuer. Currently, the yield spreads between corporates/high-yield bonds and Treasuries are very narrow. I will be very willing to buy high-yield (equity-like) bonds in a diversified fund when the yield spreads over Treasuries widen, thus offering a greater reward for the risk. Cheers!
This podcast was GREAT. HIGHLY informative. I sent it to several people. I also loved your line that Republicans talk like libertarians but spend like Democrats. So true!
One side note... you emphasize individual stocks as part of the portfolio and suggest the banking sector as terrain with potential wind at your back. I'm sure you saw Lynn Alden's May 11 deep dive on US Bancorp.
Perhaps your viewership base is much more sophisticated than me and therefore this comment doesn't apply to them. With that caveat...
I would LOVE to see you screencast yourself looking at a stock like US Bancorp: what websites you use to examine it, what are the primary markers you review, how much math do you employ and what type of math, and how ultimately do you grapple with good buy, bad buy, or not enough information to make an informed decision -- the Jim Brown equivalent of Munger's Remedial Worldly Wisdom.
Thanks for that vote of confidence! As I mentioned, bank stocks are tricky because their assets are pretty opaque even though they fully adhere to legal disclosure standards. I would trust Lyn Alden's judgment on buying bank names, because I believe she and her people do the work, as long as the individual name was conservatively sized in a portfolio. Because of the opacity of the banks' earning assets, I have learned that employee culture, which comes from years of good management and leadership, are very important considerations in evaluating banks. I'll consider that idea of stepping through a stock evaluation.