Opportunities in Fixed Income & Relationship to Rates | Podcast Episode #363

0:07
Hey, I’m Ryan Mallory and this is my Swing Trading the Stock Market podcast. I’m here to teach you how to trade in a complex, everchanging world of finance. Learn what it means to trade profitably and consistently managing risk, avoiding the pitfalls of trading, and most importantly, to let those winners run wild.

0:25
You can succeed at the stock market and I’m ready to show you how. Hey everybody, this is Ryan Mallory with Swing Trading the Stock Market. In today’s episode, we’re going to talk about the bond market and just the absolute chaos and what a dilemma that whole area of the market is right now.

0:43
And it’s well in large part due to why we’re seeing so much weakness in the broader market. Now. If you’re listening to this podcast like a couple years into the future, it’s still very relevant to listen to this. Don’t just go skip and past it because it is helpful to learn about some of these different periods in history. And right now what we’re seeing is one of the biggest declines we’ve ever seen in the bond market and the price is getting pretty attractive.

1:04
And so today’s e-mail comes from a guy that’s asking me to address this whole thing and he also provides a trade setup of his own that he wants me to consider. So he says, hey Ryan, just address me as greenish day. And so for those who don’t know, I give everybody a fake name.

1:20
So I’m not using their real name, but usually I give them a Florida redneck name unless they means that I’m from Florida unless they tell me otherwise. So in this what Casey’s telling me otherwise. Don’t give me a redneck name. Give me the name. Greenish day. A greenish day. I like to have more than just a greenish day.

1:35
I like a lot of them quite honestly. But in any case a greenish day continues to write by saying I love the podcast and how you answer questions from listeners. I hope you can answer this one. Opportunities and fixed income and relationship to rates. Now I will say this, he might be the first person to give me a title for a podcast.

1:54
I don’t know if I’ll use that one. That sounds a little bit intimidating for me, even you know, opportunities and fixed income in relationships to race. Yeah, maybe I’ll go with it, I don’t know, but I was looking for more like the bond market dilemma or can the bond market rise?

2:10
But you know what? I’ll go with his opportunities and income and relationship to race, he continues to write. I’m sorry, I don’t mean to be getting caught up here with every little sentence, but, he says. I’m a sophisticated investor trader with a degree in finance. I came up with an idea last night and did some research and found Bill Ackman just made the same exact trade.

2:27
To avoid confirmation bias, I thought I would ask you. I keep my eyes and ears on the pulse of the market and relevant economic data such as the Fed rates. the Fed has been hawkish this last year and the bonds have been hit hard. We all know the relationship to bond prices and interest rates are inverse. Now September 2023 interest rates are above 5%, the highest that we’ve seen in decades and prices of bonds have been crushed.

2:50
Although the bond yields and treasury notes are high in correlation to the Fed rates the trade, I was thinking of a set swing trade based off of the theory that the relationship between the rates and the prices. Since we are at the peak of rate hikes they can be paused for a year or two, but we do know for certain the Fed will begin to lower rates at some point in the next one to three years.

3:08
I’ve been looking at the bond ETS and they have been getting crushed this last year and are at all time lows. Is it reasonable to begin buying these bond treasury ETS since we know rates at some point will come down which will drive bond prices up? I’ve thought about the individual bonds as well additionally shorting a 30 year treasury.

3:26
Since the yield curve is inverted right now and fed rates lowering would drive long duration notes down. Inflation data plays a role in this trade. If inflation stays at 3% long term, these long duration bonds are mispriced right now. We’d love to hear your thoughts on this one on the show and how you would trade the strategy, but either long or short and theory it seems like it almost certain to be a profitable trade.

3:49
So here are my questions. Number one, what would be beneficial from where the rates are today and what can be we anticipate with a rate reduction runaway #2 where are the markets inefficient and present arbitrage #3 How will short term and long term yields move through the feds dovish signals?

4:05
All right, good question here from a greenish day. Now I’ll say this to you, I am not an expert bond trader. I don’t hold myself to be an expert, but I can give my opinion and that’s what I do on the show. I give my opinion on a lot of different things. I’m not saying it’s going to be 100% right, probably not 100% wrong either.

4:23
But nonetheless, I do try to give you some of my experience from my years of trading and what I’m doing right now and and what can be gleaned from what we’re seeing in the bond market as well. So right now you have $33 trillion being financed and that $33 trillion is getting much more difficult to finance.

4:43
So right now there is $33 trillion of debt being financed. Interest rates on the debt is unsustainable. And so the amount of money the US government’s paying on all the spending that we have done over the years. And it’s not just something that start with Biden or something to start with Trump or Obama or Bush.

5:00
This goes back. I mean, we hit one trillion back in the Reagan years and we’re adding trillions now. Like it’s no big deal. I mean, it took us up until 19, like 81 or 82 to hit 1 trillion and the existence of our country from 1776 when we declared independence to 1981, it took us that long to hit 1 trillion.

5:19
Now I get inflation and all that stuff plays a key role in that. But from 81 to 2023, we’re now sitting at $33 trillion. Pretty absurd and crazy. I mean we are spending with an abandonment and so with rising interest rates, with debt hitting 33 trillion, investors are going to get a little bit more nervous.

5:42
They’re probably going to want higher yields in order to justify buy more U.S. debt. Let’s not forget about what’s going on over in Japan right now. You know you were getting towards the end of the era of negative interest rates. And if they start raising their interest rates, what is that going to do?

6:09
They’re coming out of that period of NERP. And if that happens, in order to still get investors to put money in the US market, our bond prices have to go down further to be able to lure them back. So there’s this trade off that takes place. And so if Japan rates start to go up, you’re going to see money flow out of the US bond market and into the Japanese bond markets.

6:29
And if Washington, DC keeps spending, what is that going to do? That’s going to drive inflation higher. We’re already seeing it start to spike again. And so ultimately, I think the only way out of all this is a very hard crash in the market. I’m not saying we’re necessarily going to get one, but I do think if you really want to tame demand, if you really want to drive demand lower, everybody keeps talking about the soft landing or the no landing.

6:52
But really what you need is a hard landing, you need a hard crash to tame the demand. I mean, what kind of fantasy world are we living in where we really think that we can get through a recession with an inverted yield curve that’s like breaking records by the day, and that somehow we’re going to be able to just conquer it all with a soft landing?

7:11
I think it’s wishful thinking. I think it’s people looking for a confirmation bias. They’ll look at one report and then they want a soft landing. So therefore they’re going to look for the data that supports their idea of a soft landing. Nobody really wants to face the facts because to be honest, if Apple was to take a major correction, what do you think that would do to a lot of retirements, pensions, a lot of these firms and investment companies, they would get destroyed and a lot of them are leveraged.

7:37
We just saw with the banking crisis, all these banks decided because they weren’t making money off of the short term bonds, they went to long dated bonds a while back. And then when the bond market starts to crash, like it has of late and like what we saw back in March, they’ve got a ton of unrealized losses and then the Fed has to step in.

7:53
So it’s a very messy situation. And I think if we do get the soft landing, all that’s going to do is keep inflation higher. It’s going to keep the rates higher. And DC will keep spending regardless of who’s in power. There’s never been an election in my lifetime that’s actually changed the way we spend. And I don’t think the next election is going to do that either.

8:10
If the current president stays in power or a new person comes into power, they’re still going to spend like things. And so demand has to be killed. I lived here down in Florida, and guess what? Everybody has a boat. Everybody has a boat. Because whether it was the PPP loans or because of all the STEMI checks, nobody was really responsible with the money.

8:27
People got the PPP loans, but they didn’t really act responsibly with that money and emboldened them to to make bigger personal financial decisions. Let’s get the pool in the backyard, Let’s get the boat. Let’s get the Maserati. That’s what people did. And there’s a lot of fraud behind that PPP stuff.

8:44
And so I’m not trying to just get into all the stuff that’s happened in the past, but all the stuff ties back to what we’re seeing in the bond market right now or inflation is spiking because everybody does have a boat. I don’t have a boat. I got a lot of friends that have boats. So that to me, one, I don’t want to have to maintain a boat. You own a boat, the boat owns you essentially.

9:00
So I would rather have friends that have a boat and every once in a while they like to Take Me Out on the boat. Personally, I just like it when I get some fresh fish. But in any case, there’s a lot of macro elements that are driving these bond prices lower. And it’s not so much just the Fed. It’s a lot of bad spending habits in DC.

9:16
And so both the fiscal and the monetary decisions that are being made, from Jerome Powell to the executive branch to the halls of Congress, they are driving these bonds lower because inflation is spiking. And when inflation spikes, they got to raise interest rates to try to tame that inflation.

9:32
And for those who don’t realize, and I’ll repeat this again, when you’re talking about yields, as the yields go up, the prices of bonds go down because you have a bond that’s paying 1%, but you can go out into the open market and get a bond for 5%. Why would you buy somebody’s bond that’s only gonna give them 1%?

9:48
So they have to cut the value of that bond in order to reflect the current value of the bond market in order to get people to step in and buy it. So that brings us back to whether or not, and this is the question for this podcast, whether or not it’s a good time to start buying bonds here. I mean, we’re at ridiculous lows. And what else is at ridiculous lows?

10:05
The price that comes with being part of the Swing Trading the Stock Market team. With it, you’re gonna get all my stock market research each and every day. That’s going to conclude watch lists. That’s going to include my weekly bullish, embarrassed lists of stocks that I’m following daily trade ideas. We’re talking about updates on the overall market and updates on all the big tech stocks.

10:24
So it’s a really cool value. You’re supporting this podcast in the process. I would highly encourage you to check it out. And I’m adding new features all the time to it. So I appreciate you guys that have already done that. You support the podcast and I’m very much thankful for you all. So without getting 2 sidetracked back to the bond market, what am I doing?

10:42
I’ve been adding to my bond portfolio. I’ve been adding two different things. One is TLT. Okay. That’s probably one of the most popular ones. And so I didn’t set out to go buy it all at once. I didn’t. This is a longterm investment. Right now it’s trading at $91.50. The day before it went, you know, even further down it was at $90.69.

11:01
So this is a long term play for me. It might be something that I hold for 10/15/20 years. But ultimately what I’m looking for is the rates that we’re at today to eventually to start coming down again. And I’m not sure if that happens in the near term or in the long term. But if it happens in the near term, it’s probably going to be because something broke.

11:19
And if something broke, there’s a good chance the Fed will step in and start cutting interest rates. We’ve seen that multiple times in the past. We saw it in 2018 when we had the taper tantrum. The Fed was trying to taper their assets. They were trying to sell off their assets. They were trying to raise interest rates. They were trying to do back then what they’re doing right now.

11:37
And so when the market had a essentially a hissy fit about the whole thing, in October, November and December of 2018, the Fed essentially paused what they were doing and started cutting rates again. And then in 2020, when everything shut down due to the whole COVID pandemic, they did an emergency rate cut, which was absolutely foolish.

11:56
Yeah. In their mind, they think what they did was the right thing. It wasn’t. And they injected just gobs and gobs and gobs of money into the system. I firmly believe that if we would have let things fall apart, as it should have, we would be at a much better place.

12:12
Today. We have a much better understanding for where the bottom is in this market and whether or not we’ve reached it yet. But the Fed, they’re very much influenced by politicians. They’ll say that they’re not. They’ll say that they’re very unbiased and that they’re only worried about their two mandates of employment and inflation.

12:30
That’s not really true. And so they inject tons of money in the market from 2020. If they break something, again like what we just saw with the regional bank crisis in March of 2023 here, what do they do? They started doing the swaps with the banks that had bad bond portfolios and so it bailed them out again.

12:45
And the market’s been rallying ever since the March lows. It is only until August and September here what we’ve seen a little bit of a pullback. So I’ve been adding TLT. I’ve been adding HYGH which is a interest rate hedged high yield bond ETF.

13:01
But I don’t add them all at once. Like I said, I add it over time. I’ve been adding to TLT for the better part of like six to seven months now. Same thing with HYGH. I don’t know the exact amount of time I’ve been doing it, but I would say somewhere between like four to six months I’ve been doing it and and I’m down on them right now, but that’s fine.

13:17
This isn’t my dividend account. Yes. I’m hoping that it’ll rise back up over time, but I’m also going to be collecting a yield as well. And these are two instruments where I just essentially add a few bucks to them every week. And so I do think long term there will be lower interest rates at some point. I’ve been reading Word 2024, they’re not expecting any of that.

13:35
And that’s if that’s the case, that’s fine. That doesn’t really bother me none. Like I said, this is a position that I want to hold 15 to 20 years. I’m not trying to make money off of it right out of the gate. And so it’s much different than what I do with my swing trades. And honestly, I hope the bond market still continues to push lower because I’d like to get it get in at even better prices.

13:55
And do I think that the Federal Reserve will keep rates higher for longer? Their history suggests no. And for the reasons that I’ve already mentioned. And so I do think at some point something will break. I wouldn’t be surprised if something broke this weekend or in the next couple of weeks because the rates are high, they’ve broken the October highs.

14:11
They’re far higher than they were back in March. And so the potential for something to break is very real at this point. And so if they do that, then the question becomes, is the Fed going to be like good, this is what we wanted. We need to get some reason back into this economy and to the markets. We need to let some folks fail.

14:28
And if they do that, I don’t think you’re going to necessarily see bond prices spike right away because they’re not going to be doing that knee jerk reaction to cutting rates. But history suggests the exact opposite, that they’ll actually cut rates, they’ll do an emergency rate hike, they’ll feel the pressure from the politicians.

14:44
Remember, 2024 is an election year. I think it’s going to be very hard if something’s breaking for them to be able to resist the pressures that’s going to come. Some people seeking reelection in office because then they’re going to be tied to the economy. They’re going to want them to cut rates somehow so that they can stimulate the economy again, even if it’s just for a short term duration.

15:02
Remember people in Washington, and I’m not trying to get political here. Some people accuse me of getting political on this show at times I really don’t. I’ve never like endorsed a candidate or told you what party I like. But I will say this, there’s not a politician out there that I trust. I don’t trust any of them.

15:20
And so when it comes to interest rates, if something breaks in 2024 or something starts to really fall apart in an election year, you can be assured that politicians are going to assert some massive political pressure on the Federal Reserve to do an emergency rate cut.

15:36
And that they do that would drive bond prices back to the upside. I’m not saying it’s going to go right back up to all time highs, not at all. Depends on how much they cut I guess. But but that would be the trade. That would be the trade that something will break and that the Fed much to its history of succumbing to pressure, they will go ahead and cut rates.

15:54
If you enjoy this podcast, I hope that you can leave me a 5 star review on whatever platform that you’re listening to. Also, make sure to check out swingtradingthestockmarket.com to get all my stock market research. And please send me your e-mail. Send me your questions. I wanna hear your stories. I wanna hear what you have to say.

16:10
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16:31
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16:52
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