Fixed Income Weekly — 1/10/24
Searching for ways to better understand the fixed income space or looking for actionable ideas in this asset class? Bespoke’s Fixed Income Weekly provides an update on rates and credit each week. We start off with a fresh piece of analysis driven by what’s in the headlines or driving the market in a given week. We then provide charts of how US Treasury futures and rates are trading, before moving on to a summary of recent fixed-income ETF performance, short-term interest rates including money market funds, and a trade idea. We summarize changes and recent developments for a variety of yield curves (UST, bund, Eurodollar, US breakeven inflation, and Bespoke’s Global Yield Curve) before finishing with a review of recent UST yield curve changes, spread changes for major credit products and international bonds, and 1-year return profiles for a cross-section of the fixed income world.
Our Fixed Income Weekly helps investors stay on top of fixed-income markets and gain new perspectives on the developments in interest rates. You can sign up for a Bespoke research trial below to see this week’s report and everything else Bespoke publishes for the next two weeks!
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Junk Bonds Crushing Long-Term Treasuries
Since the bond market peaked in late 2021 just before the Fed embarked on its attempt to tame inflation by hiking rates, it has been painful to be an investor in “risk-free” Treasuries at nearly all points on the curve. The most pain has been felt at the long-end of the Treasury curve on notes expiring in 10-20+ years.
While the 20+ year Treasury ETF (TLT) is down 28% on a total return basis over the last two years, you may be surprised to see that the high-yield (junk) bond ETF (HYG) is actually now up on a total return basis over the same time frame. HYG has also easily outperformed the aggregate bond market ETF (BND), which is down 7.4% over the last two years.
Going back five years instead of two, had you decided to go with the “safety” of long-term Treasuries (TLT) over the higher-risk junk bond space (HYG) back in early 2019, you’re still kicking yourself as HYG is up 18.3% over the last five years compared to a 10.6% decline for TLT over the same time frame.
As shown below, TLT was actually up nearly 50% YoY versus a decline of more than 10% for HYG at the time of the COVID Crash in early 2020 when the Fed cut rates to zero while riskier assets like stocks and junk bonds were tanking. But ever since the COVID Crash lows, long-term Treasury yields have been trending higher (meaning lower bond prices).
Because the high-yield bond ETF has a lower average duration than TLT, it has been spared the massive drop in price that long-term Treasury bonds have experienced. Couple that with high yield spreads being in a relatively good place, and HYG is currently trading close to a five-year high on a total return basis. TLT investors are jealous.
Just as longer duration worked against TLT as rates were rising, it reaps the rewards during periods when rates decline. Since the 10/19/23 peak in the 10-year yield, for example, TLT has rallied 16.3% while HYG is up less than half that (7.8%).
Chart of the Day: S&P 500’s Most Overbought Stocks and Sectors
The Worst Merger Ever and the (Not So) Magnificent Seven of 2000
Bespoke’s Morning Lineup – 1/10/24 – Big Rally in Small Stocks
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“Time makes more converts than reason.” – Thomas Paine
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
We’re looking at another flat morning for US equity futures this morning. Last we looked, S&P 500 futures were exactly unchanged, and both the S&P 500 and Dow were little changed. While there’s been little move in equities, US Treasury yields are lower as the 10-year yield has dipped back below 4%.
In terms of economic data, it’s a quiet morning. Mortgage applications surged over 9%, but the only other report on the calendar is Wholesale Inventories at 10 AM. The next major report will not be until tomorrow when the CPI for December is released. While it’s not economic data, investors will also be on the lookout for an announcement from the SEC regarding potential approval for a bitcoin ETF after yesterday’s disastrous turn of events where it was seemingly approved only but then taken back as the SEC claimed its X account was compromised.
In Asia, the Nikkei surged 2%, but most other major benchmarks in the region were lower, and in Europe, equities are just like US futures – flat as a pancake.
It’s now been 50 trading days since US markets made their Q4 lows on 10/27/23. One of the more impressive rallies has been the 20%+ gain in the small-cap Russell 2000. That move ranks as the largest 50-day rally in the index since 2020 and one of only 21 periods in the index’s history since 1979 that it rallied that much or more in a 50 trading-day period. Before the experiences during the early days of COVID, there was one occurrence in March 2019, but before that, you have to go back to 2012.
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The Closer – Polish and Other EM Policy, EV Metals, Trade – 1/9/24
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Looking for deeper insight into markets? In tonight’s Closer sent to Bespoke Institutional clients, we begin with a look into Polish and EM policy rates (page 1) followed by an update on EV metals markets (page 2). We then turn over to today’s update of US trade data (page 3) before closing with a recap of the 3 year note auction (page 4).
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Daily Sector Snapshot — 1/9/24
Bespoke Stock Scores — 1/9/24
Bitcoin Getting Back Up There
While most areas of financial markets are lower one week into the new year, bitcoin is already up double-digit percentage points. Since bottoming in late 2022, bitcoin has now rallied just under 200%, and as shown in the chart below, its price is starting to get back up to levels that have only been seen for a brief period of time back in 2021. In fact, at $46,800, bitcoin has only traded higher on 6.14% of days since the start of 2017 when it first crossed above $1,000.
