Email of the day on long bond positions as yields rise
Comment of the Day

February 22 2023

Commentary by Eoin Treacy

Email of the day on long bond positions as yields rise

I was watching your commentary today, you seem once again to be somewhat circumspect with regards to longer term bonds the world over, and as you have repeatedly said over recent weeks, yields are in a consistent trend higher. Why then do you continue to hold TLT, a very long duration bond that gets harder hit when yields rise, and the DoubleLine fund too? Can you explain your thinking on this front, as your commentary seems at odds with your actions, in this instance at least.

Eoin Treacy's view

Thank you for this question which I’m sure will be of interest to the Collective. The simple answer is that bond yields are still trending higher but I do not expect that condition to last. I initiated my long positions at yields I found attractive. I’ll buy more if yields go much higher from here.

The most important point is not to forget that monetary policy acts with a significant lag. Central banks have raised rates very aggressively, yields curves are still inverting and money supply is contracting for the first time. Between $200 And $300 billion needs to be refinanced in the high yield debt market every month between now and 2025.

Central banks are in an exceptionally difficult position. High debt and falling tax receipts are a combustible mix when rates are rising. That suggests getting inflation under control is a high priority. At the same time, the cost of achieving that goal could result in a sharp contraction in economic activity and certainly draining liquidity is likely to be a headwind to consumers eventually.

I am willing to hold my long-term bond longs because when the yield curve moves from inverted to rising, the long-end of the curve should outperform. Meanwhile, I am happy to hold the DoubleLine Income Solutions funds because it is loaded with energy sector and Latin America company debt that I believe carries the least risk of default and the 11-12% yield provides ample compensation for the risk in my view.

At that point I will also be willing to be more aggressively short of stock market indices. 

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