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Are bond prices still crazy high?

Gilts, bonds, and interest-bearing shares
Gan020
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Are bond prices still crazy high?

#500965

Postby Gan020 » May 17th, 2022, 12:46 pm

Bond prices have pulled back quite a bit since Christmas and thus the yields have improved. But just because it's cheaper doesn't mean it's good value and won't get cheaper still.

I'm trying to work out whether I should be committing my cash or waiting. At the moment I'm very much in the place of not wanting to buy any bond with a maturity longer than 5 years and by preference somewhere around 3 years.

Current market forecasts suggest BOE will raise rates to by 1.5% to 2.5% by middle of next year. The fed is predicted to raise rates by 2.5% over the same period. I'm generally not in disagreement. High wage rises are starting to get embedded, unemployment is falling strongly. GDP isn't doing great though and retail sales are poor, so I find the top at 2.5% a little bullish. I do note the 10 year gilt pulled back from 2% to 1.7% on the back of the poor retail and gdp data but is now creeping back up again to 1.8% as of today. Perhaps as of today the 2.5% base rate is no longer on the cards.

I took a look at Tesco 29's and 33's and compared these with gilts.
The 29's have a YTM of 3.5% vs 7 year gilts of 1.67%
The 33's have a YTM of 3.8% vs 10 year gilts of 1.82%
And now I got puzzled. Is a premium for the 29's of 1.8% over gilts correct for Tesco? I'm not sure. It seems a little low to me but I can't say I have any real evidence for that and I'd prefer an evidenced based approach.
But what I found most puzzling is the 7 and 10 year gilt rates. If the base rate is going to 2.5% by the summer of next year and then falling to a long term rate of 2% then the 7 and 10 year gilt rates look wrong to me. Of course they are not wrong because that's what the market has decided but nonetheless the 7 year gilt implies the base rate tops out at below 2%.

And then I tried something else. I can get 2.9% on a bank FSCS protected bond 5 year bond, so does 3.5% for Tesco seem worthwhile. I think not.

The 29's have fallen in price from 130p in August 2021 to 116p so that's about a 12% capital loss to get around 5% of interest.

At 116p I'm still not tempted.

hind
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Re: Are bond prices still crazy high?

#500987

Postby hind » May 17th, 2022, 2:26 pm

Current market forecasts suggest BOE will raise rates to by 1.5% to 2.5% by middle of next year.

Short sterling doesnt agree
https://www.barchart.com/futures/quotes ... res-prices

dealtn
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Re: Are bond prices still crazy high?

#501461

Postby dealtn » May 19th, 2022, 8:47 am

hind wrote:Current market forecasts suggest BOE will raise rates to by 1.5% to 2.5% by middle of next year.

Short sterling doesnt agree
https://www.barchart.com/futures/quotes ... res-prices


Short sterling futures are as good a market forecast for the path of base rates as you can get (particularly so when adjusted for the base rate:libor basis, and the convexity issue regarding margin posting). What current market forecasts are you using that display the disparity?

Gan020
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Re: Are bond prices still crazy high?

#501503

Postby Gan020 » May 19th, 2022, 11:23 am

Equities weak but bonds holding up. Prefs under pressure but still too expensive for me.

I'll sit on my cash a while longer.

bruncher
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Re: Are bond prices still crazy high?

#501506

Postby bruncher » May 19th, 2022, 11:37 am

Gan020 wrote:Equities weak but bonds holding up. Prefs under pressure but still too expensive for me.

I'll sit on my cash a while longer.



Prices well down. The situation reminiscent of 2008.

Gan020
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Re: Are bond prices still crazy high?

#501510

Postby Gan020 » May 19th, 2022, 11:55 am

Carnvial sold $1b of debt at 10.5% today. Just 7 months ago it sold $2b at 6%.

This shows just how much the market is re-adjusting.

However, I also understand issuance has fallen off in the last couple of months as corporates don't like the yield they are being asked to pay. Trouble is you can only push new issuance so far out. At some point you have to refinance existing debt.

hind
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Re: Are bond prices still crazy high?

#501512

Postby hind » May 19th, 2022, 11:58 am

dealtn wrote:
hind wrote:Current market forecasts suggest BOE will raise rates to by 1.5% to 2.5% by middle of next year.

Short sterling doesnt agree
https://www.barchart.com/futures/quotes ... res-prices


Short sterling futures are as good a market forecast for the path of base rates as you can get (particularly so when adjusted for the base rate:libor basis, and the convexity issue regarding margin posting). What current market forecasts are you using that display the disparity?


dealtn , I was quoting Gan020 above. Yes agree short sterling is what I use for market expectations. Not than Im convinced by BoE, especially as seen Andrew Bailey form in the past

hind
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Re: Are bond prices still crazy high?

#501514

Postby hind » May 19th, 2022, 12:03 pm

Gan020 wrote:Carnvial sold $1b of debt at 10.5% today. Just 7 months ago it sold $2b at 6%.

This shows just how much the market is re-adjusting.

However, I also understand issuance has fallen off in the last couple of months as corporates don't like the yield they are being asked to pay. Trouble is you can only push new issuance so far out. At some point you have to refinance existing debt.


Imagine credit risk the biggest shift here. But agree base rates are a false market that has partly come about by QE and pension rules

Gan020
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Re: Are bond prices still crazy high?

#507091

Postby Gan020 » June 14th, 2022, 10:04 am

I wanted to share this.

For the last 2 years I have been internally battling with myself with my portfolio. How much to hold in cash, how much to invest, what to invest in.

It's been a hard road as I've been looking at the markets and what I perceived as crazy valuations. Indeed a significant proportion of my holdings I bought on the day of the Pfizer announcement of the Covid vaccine. As the valuations got higher and higher I sold out of many leaving myself generally with short term bonds (<5 years) and some holdings in bond funds with very low duration. This period was very hard for me as I feared a quick short term sell-off would destroy my portfolio value.

So, for the first time today I'm actually looking at my portfolio and feeling quite comfortable. I should say that doens't mean I think I'm going to make great returns. Indeed far from it, more likely I think my returns will be poor but at least I think I will have some returns with reasonalbe certainty and my downside is limited to an amount I'm comfortable with. I still believe valuations to be too high but my worst case scenario looks completely manageable. I don't suppose we are at the bottom for one minute and I suspect I will still be taking some mark to market capital losses but I do believe my interest/dividends will outweigh the capital losses or have a very decent chance of doing so.

Further I now see some choices of what I might want to buy. Not lots of good choices but some and additionally some options to park my cash for short periods of time whilst I wait for something better to come along. Every day now the choices are getting wider and the number of bonds I think are completely mispriced is diminishing. Of course those that were competely mispriced are still crazy expensive and I wouldn't touch them, but nevertheless it is healthy to see the bond market correcting itself.

I bought some LAD2 recently. Ladbrookes 22's (now owned by Entain) which mature in September. Available below par and the coupon is 5.125%. A yield of around 5.9% depending on what commission you pay for a £10k trade. OK, it's only for 3 months but tbh I'm happy to take 5.9% for three months and see what the market looks like then.

hind
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Re: Are bond prices still crazy high?

#507162

Postby hind » June 14th, 2022, 1:17 pm

Personally have over the years tried to invest my bond pot across the curve, so keep resetting via maturities or tenders as was the case with bank prefs. There is also a small but not zero credit risk holding cash at a broker

Wozzitworthit
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Re: Are bond prices still crazy high?

#507167

Postby Wozzitworthit » June 14th, 2022, 2:02 pm

Gan020,

Thanks for the tip ref LAD2, had some ages ago but for some reason, unlike most of the other ones I had sold, I hadn't been watching it at all

Anyway, bought some a few minutes ago, I have a problem holding cash and am having to sit on my hands a lot lately whilst waiting for some of my other fixed interest disposals to drop (hopefully)

Woz


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