Cash, 10Y Treasury bond & 10Y TIPS offer attractive yields, a level not seen since 2008, so let's explore the tradeoffs & risk of investing across different economic scenarios.
Great post Amrita. I love scenario analysis so especially loved your table showing potential growth and inflation outlooks and their effects on cash, US treasuries and TIPS. Great work!
Thanks Dylan, I am a huge fan of scenario frameworks, just makes complex things much more digestible. I am glad you liked it. If you like scenario stuff, some of my earlier posts were on scenario building analysis for oil, good and the S&P 500. Feel free to check it out!
Thank you for another insightful article, Amrita! 😃
My father-in-law was a very wealthy man, and only invested in bonds and a few stocks. His wealth didn't grow so much as his investments were safe and preserved the wealth he made from being a successful farmer.
It is equally important to protect one's own wealth, cuz in the quest of multiplying wealth and if not done correctly, the person often loses quite a bit. Was your father-in-law a farmer in California?
I am very sorry about the error on my part. The general idea is the same though. Of course with the muni bond you mentioned, you would receive a lower yield than a corporate bond, but that is partially offset with the tax advantage.
But then similar to corporate bonds, should interest rates rise from here (which I don't believe is a high probability), or a credit crisis which leads to a recession (quite probable), the price of the muni bond would be subject to volatility and downside.
However, if you hold your muni till maturity, short term price volatility should not affect your decision to invest since you are guaranteed to get your capital back with interest, on which you pay a substantially lower tax than the corporate bond. Plus, the yields are very attractive at this level.
Corporate grade bonds, like the ones you suggested are looking indeed looking attractive at current nominal yields of 4-5%. I wouldn't be concerned about the safety of these bonds. The only thing on my mind is that the spread between the 10Y US Treasury and corporate bonds has not really widened, as would be expected in a tightening cycle such as now to reflect higher risk premia. Therefore, my thinking is should there be a credit event in the near future (1-2 years), there is likely going to be price volatility in the bond. But the general state of the corporate bond landscape is safe, given how these companies have boosted their cash reserves and locked in low rates before the tightening cycle began. But, if you are happy with the 4-5% tax free locked over a period of 15-20 years, without the need to pull out of it earlier, I think this would be a fair long term investment that will produce real returns.
Thanks Sully. I think, long term the supply demand dynamic for bonds point to higher yields, though in the short term, should a recession or a credit event take place, the Fed will accomodate, driving down yields, only to bring back another wave of inflation, since fiscal and monetary policies are no longer working independently.
Hi. I’m sorry if this is a silly question but how would an individual investor “lend cash” at 5.6% or whatever you said? When I hear people talk about cash I assume they’re just talking about having liquid cash in the bank. Are there banks offering that kind of return to park money with them? Bc my bank surely isn’t.
No, by cash, I don't mean cash in a bank's savings account, because that certainly will not pay 5.6%. But, an individual choose to put liquid cash in a money market fund. A money market fund is a type of mutual fund that invests in high-quality, short-term debt instruments, cash and cash equivalents. These are cash-like, low risk and highly liquid funds and yields a rate closer to the the 3M Treasury bill.
As per the CBO projection, the deficit will double by 2033, and as you say there is no end in insight. We are looking at a sad debasement of the dollar, until one day people and nations lose trust in it? Might take a while.
The market desperately wants QE and the Fed are determined to break something to give them an excuse to do so at which point it should be clear they have abandoned the fight over inflation in favour of saving the bond market. So USTs at that stage then into TIPS as the market realises inflation is going to rip. So right now cash please!😎
You have beautifully the journey. I will fully agree with you.
What concerns me is that despite bond yields at levels they are currently, inflation is still higher than desired. Therefore, should a credit event of sorts happen and the Fed has to come to save the day, they would be technically doing so when inflation is still higher than normal, and this might put speculative pressure on the dollar.
Great post Amrita. I love scenario analysis so especially loved your table showing potential growth and inflation outlooks and their effects on cash, US treasuries and TIPS. Great work!
Thanks Dylan, I am a huge fan of scenario frameworks, just makes complex things much more digestible. I am glad you liked it. If you like scenario stuff, some of my earlier posts were on scenario building analysis for oil, good and the S&P 500. Feel free to check it out!
https://amritaroy.substack.com/p/oil-prices-are-spiking-what-will
https://amritaroy.substack.com/p/equity-risk-premium-part-2-where
https://amritaroy.substack.com/p/the-curious-case-to-include-gold
Thank you for another insightful article, Amrita! 😃
My father-in-law was a very wealthy man, and only invested in bonds and a few stocks. His wealth didn't grow so much as his investments were safe and preserved the wealth he made from being a successful farmer.
Thanks Charlotte.
It is equally important to protect one's own wealth, cuz in the quest of multiplying wealth and if not done correctly, the person often loses quite a bit. Was your father-in-law a farmer in California?
Yes he farmed here.
Good article, concise !
Any opinion on BBB to AA munis on sale below par these day?
TC
Thanks for asking the question. Please allow me a few days to get back to you with a proper answer on this.
Thank you.
I am seeing CA tax free munis at $82-85 A-rated available 4-5 % yield 2040 to 2050 ish maturities.
Depending on tax bracket, that is 7-8 % taxable equivilant but with low risk.
Best
TC
Hi,
I was referring to Municipal Bonds, not corporate.
Regards
TC
I am very sorry about the error on my part. The general idea is the same though. Of course with the muni bond you mentioned, you would receive a lower yield than a corporate bond, but that is partially offset with the tax advantage.
But then similar to corporate bonds, should interest rates rise from here (which I don't believe is a high probability), or a credit crisis which leads to a recession (quite probable), the price of the muni bond would be subject to volatility and downside.
However, if you hold your muni till maturity, short term price volatility should not affect your decision to invest since you are guaranteed to get your capital back with interest, on which you pay a substantially lower tax than the corporate bond. Plus, the yields are very attractive at this level.
No worries, thank you for the analysis
Corporate grade bonds, like the ones you suggested are looking indeed looking attractive at current nominal yields of 4-5%. I wouldn't be concerned about the safety of these bonds. The only thing on my mind is that the spread between the 10Y US Treasury and corporate bonds has not really widened, as would be expected in a tightening cycle such as now to reflect higher risk premia. Therefore, my thinking is should there be a credit event in the near future (1-2 years), there is likely going to be price volatility in the bond. But the general state of the corporate bond landscape is safe, given how these companies have boosted their cash reserves and locked in low rates before the tightening cycle began. But, if you are happy with the 4-5% tax free locked over a period of 15-20 years, without the need to pull out of it earlier, I think this would be a fair long term investment that will produce real returns.
Well written, Amrita. With government budgets expanding at this rate, the downward pressure on bonds will most likely continue.
Thanks Sully. I think, long term the supply demand dynamic for bonds point to higher yields, though in the short term, should a recession or a credit event take place, the Fed will accomodate, driving down yields, only to bring back another wave of inflation, since fiscal and monetary policies are no longer working independently.
Hi. I’m sorry if this is a silly question but how would an individual investor “lend cash” at 5.6% or whatever you said? When I hear people talk about cash I assume they’re just talking about having liquid cash in the bank. Are there banks offering that kind of return to park money with them? Bc my bank surely isn’t.
No, by cash, I don't mean cash in a bank's savings account, because that certainly will not pay 5.6%. But, an individual choose to put liquid cash in a money market fund. A money market fund is a type of mutual fund that invests in high-quality, short-term debt instruments, cash and cash equivalents. These are cash-like, low risk and highly liquid funds and yields a rate closer to the the 3M Treasury bill.
https://www.investopedia.com/terms/m/money-marketfund.asp#
Ok thank you. Why not just say investing in “money market funds” ? 😂 😜
You are right, I should have added a paragraph in the section which clarified that investing in cash is equivalent to money market funds.
Im messing with you. Thanks for being so thorough and answering our questions. Really enjoying your content.
$33.67 trillion and counting. Theoretically it can go on like this ad infinitum but one day soon they’ll run out if “ink”
As per the CBO projection, the deficit will double by 2033, and as you say there is no end in insight. We are looking at a sad debasement of the dollar, until one day people and nations lose trust in it? Might take a while.
you make impression )
Thanks Hannah. Glad you enjoyed it.
The market desperately wants QE and the Fed are determined to break something to give them an excuse to do so at which point it should be clear they have abandoned the fight over inflation in favour of saving the bond market. So USTs at that stage then into TIPS as the market realises inflation is going to rip. So right now cash please!😎
You have beautifully the journey. I will fully agree with you.
What concerns me is that despite bond yields at levels they are currently, inflation is still higher than desired. Therefore, should a credit event of sorts happen and the Fed has to come to save the day, they would be technically doing so when inflation is still higher than normal, and this might put speculative pressure on the dollar.
They can either have a strong dollar or a functioning bond market but not both! Rock and a hard place…
You are right, today's situation is trickier with the growing level of US government debt on top of that.
Excellent work.
Thanks Stirling for your continuous support.
Absolutely my pleasure to aid someone who is dedicate to her substance.