The bond market is cracking.

But you were forewarned.

Oct 04, 2023

In July of this year Philo sent out a piece to touch upon (amongst other things) the debate on Real Assets Vs Non-Real Assets, why stocks are not dropping, investing in government bonds and lastly the macro environment we find ourselves in.

To outline the piece:

Bond yields are not the same as yields on stocks.
Don’t conflate macroeconomic expectations with the stock market!
US and China are already in war.
Why are stocks not dropping?
Benign Vs Harsh environments — where are we now?
And how does that affect inflation?

What happened since then was government bonds cracked (ie. yields spiked) as the market started to slowly realise inflation will remain sticky and rates aren’t going back down anytime soon.

While 80% of the investing public wanted to go long TLT and “lock-in” rates for long to make that coveted 4-5% — Philo warned against it on Substack as well as Twitter.

Here is the piece.. 👇

What the hell is happening? July 2023

July 28, 2023

One year ago, in the July 2022 version of WTHIH we talked about the Fed’s goal to bring down inflation, regardless of the price the economy or the stock market would pay.

Read full story

A key excerpt below.

Benign Environments, Inflation & Yields

Investors seem to believe inflation will go back to ~0%, simply because it was there before. I think inflation was low because post-2009 the environment was so benign and in reflation mode (after the GFC bust) without many problems.
The Fed wanted to keep inflation at 2% at least — and moved rates as low as needed to keep the inflation-target narrative alive. Because how can you inflate the debt if inflation moves below 2%?!
But is this the environment we are in today? Why should cash holders lend out their capital today for such low prices? In fact I think sovereign bond yield curves should move up in most Western economies (US, UK, Germany + EU etc.)
I expect a repricing event where sovereign yields will move up rather suddenly, in a process of price discovery. I think yields are lower than they should be (as per current fundamentals) because there are forced buyers buying those bonds.
Retail investors, financial institutions like banks and insurance companies, major corporates etc. spent too many years basically earning nothing; that they now feel compelled to lock in some good rates across the curve — and make a spread on the deposit balances they hold, which are making much less than the curve.
Banks seem to be enjoying this party because profitability is at a high. The bonds they hold aren’t breaking (down) and the rates they pay out are significantly lower — this is the headwind they needed. i.e. The carry trade is working brilliantly!