The Name’s Bond... Treasury Bond.

Gentlemen prefer bonds. Is now the time to invest? [The Rude Awakening] October 18, 2023 [WEBSITE]( | [UNSUBSCRIBE]( The Name’s Bond… Treasury Bond. - Set It and Forget It… For Three Decades? - What’s 5% Compounded Over 30 Years? - Is it time to jump back in? --------------------------------------------------------------- [Sean Ring] SEAN RING There are many intelligent people out there touting the return of the treasury bond. Why? We’ll have to find out. I’m going to approach this from the skeptic’s point of view. I’ve hated treasury bonds for a while. And I don’t think the inflation story is over yet. There’s far too much geopolitical instability, especially in the Middle East, to assume oil prices will moderate. With that said, it’s my job to investigate these things. It may be humbling. It may be confirmatory. In this Rude, we’ll explore why gentlemen prefer bonds again. What Are Bonds? First things first: let's define what a bond is. There are two ways to think of a bond. The first is that it is a promise. My word is my bond: dictum meum pactum in Latin. That’s been the motto of the London Stock Exchange since 1801. This saying goes back at least to 1500 when a Scottish source has "O kingis word shuld be o kingis bonde" (A King's word should be a King's bond.) The second way to think about it is as a tradable loan. The issuer, such as the US Treasury, will issue the bond to investors. Later, investors may choose to trade these bonds with each other to, say, free up cash for a higher-yielding investment or transfer risk. The ability to trade securities (stocks and bonds) is one of the greatest inventions ever. You’re not stuck with investments anymore. The big caveat is that you may have to sell the securities at a dramatically different (lower) price than you bought them for. Different Types of Bonds. U.S. Treasury Bonds U.S. Department of the Treasury issues treasury bonds (T-bonds), the quintessence of government debt instruments. They come with varying maturities, extending from 20 to 30 years. Investing in T-bonds is the same as lending money to the federal government, which promises to pay periodic interest and return the principal amount at maturity. The principal is also known as face value. The coupon on the bond is fixed. Advantages: Safety: T-bonds are considered among the safest investments as they are backed by the "full faith and credit" of the U.S. government. Predictable Income: The fixed interest payments provide a steady income stream, making them appealing to risk-averse investors and retirees. Disadvantages: Low Yield: Safety comes at the cost of lower yields than other bond types or equities, although yields have increased considerably lately. Interest Rate Sensitivity: Longer-term bonds like T-Bonds are susceptible to price fluctuations when your Fed Chairman goes overboard during a hiking cycle. U.S. Savings Bonds A notch down in complexity are U.S. Savings Bonds, another product of the Treasury Department. These non-marketable bonds can't be sold on the secondary market. There are two primary types: Series EE and Series I, with the latter protecting against inflation. Advantages: Affordability: They can be purchased for as low as $25, making them accessible to a broad spectrum of investors. Tax Advantages: The interest earned is exempt from state and local taxes. Disadvantages: Low Yield: Like T-bonds, the returns (yields) are modest. Lack of Liquidity: A secondary market is necessary to maintain liquidity. U.S. Investment Grade Corporate Bonds Shifting the focus to the corporate sphere, corporations with high credit quality issue investment-grade corporate bonds. Rating agencies like Moody's and S&P assess creditworthiness, categorizing bonds as investment grade if rated BBB- or higher. Advantages: Higher Yield: They offer better returns compared to government bonds. Diversification: Adding corporate bonds to a portfolio can provide diversification benefits. Disadvantages: Credit Risk: There's a risk that the issuing corporation may face financial hardship, affecting its ability to pay back its debt (and perhaps even the interest payments). U.S. High Yield Bonds High Yield Bonds (or junk bonds) are the opposite of investment-grade bonds, bearing a rating of BB+ or lower. Corporations with questionable credit quality issue these bonds, which entail a higher risk. Advantages: High Potential Returns: The riskier nature commands higher yields. Diversification: They can also be a diversification tool, albeit for the more risk-tolerant investor. Disadvantages: Credit Risk: The high yield comes with a higher likelihood of default. Market Risk: These bonds are more susceptible to market fluctuations and economic downturns because they act similarly to equities. Now that we’ve distinguished between the different types of bonds, let’s look at T-bonds specifically. [Nvidia’s Supplier Reveals “A.I. Crown Jewel”]( A.I. investors…get ready: Because a little-known supplier just received a GIGANTIC order from Nvidia. In short: This supplier is planning to pump out 2,000,000 units of a critical piece of tech which I call… [“The A.I. Crown Jewel”]( [Click here to learn more]( A.I. investors…get ready: Because a little-known supplier just received a GIGANTIC order from Nvidia. In short: This supplier is planning to pump out 2,000,000 units of a critical piece of tech which I call… [“The A.I. Crown Jewel”]( [Click Here To Learn More]( Why T-Bonds Are Making a Comeback. I don’t expect to convince anyone who’s a Doomsday Prepper. But if you think the sun will rise in America in the next few years, you may want to consider this case. [Rude] My goodness, it certainly isn’t the technical picture. That chart is uglier than an SBF booty call. According to my friend and colleague [Zach Scheidt]( Now that long-term interest rates have moved sharply higher, investors like you and me can get great discounts buying long-term Treasury bonds. Most brokerage platforms allow you to buy individual Treasury bonds at current market prices. He continues: In the short term, the trend for bond prices is lower. And I don't know how long that will last. Full disclosure, I personally have a bearish position on long-term bonds as part of my Income Alliance trading program. This position has been profitable so far as bond prices have been trending lower. But at this point, we're likely getting close to the end of rate hikes. And sometime in the next two years, we're likely to see rates cut, especially if the broad U.S. economy weakens. Keep in mind, the U.S. can't afford to keep piling on debt as interest rates rise. So at some point (and relatively soon), there will be political pressure to drive interest rates lower. My recommendation for a long-term retirement play is to start accumulating some long-term Treasury bonds. Again, Zach is talking about a long-term play. That means it’s about the income (coupons) you’ll receive and the capital gain you’ll earn over time as the bond “pulls to par.” Pulling to par is what bonds do when they approach maturity. Say you bought a 30-year t-bond today at a discount (below par) price of 87. You’ll receive the full face value of 100 at maturity in 2053. That means your capital gain over the next 30 years will be 13. Of course, you must believe the USG will still be able to pay its debts by then. But the ability to pick up 60 coupon payments (US t-bonds pay semiannually) and get your principal back is attractive to certain investors. Also, if Jay Powell decides to cut rates over the next few years, which he almost certainly will, your bond price will increase in the short term. Bond yields and prices have an inverse relationship: when one goes up, the other goes down. In fact, the longer you go out on the yield curve - and 30 years is the farthest you can go - the more sensitive your bond’s price will be to moves in yield. Wrap Up Zach isn’t the only one who thinks this way. Lance Roberts of Real Investment Advice has published similar pieces. It’s nice to think you can “set it and forget it.” But I’d caution you about the assumptions you must have to buy 30-year bonds this way. You’ve got to believe the USG will still be around then. You’ve got to believe we’re at or near the top of the hiking cycle. You’ve got to believe this is the best alternative for your cash. Food for thought! I’ll be following up on this in the coming weeks. In the meantime, have a great day! All the best, [Sean Ring] Sean Ring Editor, Rude Awakening X (formerly Twitter): [@seaniechaos]( In Case You Missed It… Demystifying Industrial Production Good morning from chilly Northern Italy! America is still the world’s second-largest manufacturer. But it pales in comparison to its former self. However, since the advent of “nearshoring” - bringing manufacturing back home or close to allies - there’s hope for a resurgence. Besides, with Janet Yellen telling the world that [America can certainly afford two wars]( America better get working! In today’s Rude, we’ll look at yesterday’s Empire Manufacturing Index and today’s industrial production and capacity utilization numbers. Yesterday’s Empire Manufacturing Index A Brief Review of the Empire State Manufacturing Index First, what is it? The EMSI is a monthly survey of manufacturers in New York state. The Federal Reserve Bank of New York conducts the survey. The bank sends the survey monthly to business leaders representing a wide swath of the manufacturing sector. The headline number summarizes general business conditions in New York state. The index is widely watched for insights into the state and direction of manufacturing in New York state. The index measures the health of New York manufacturers relative to a year ago and has been strongly correlated with industrial production nationally since it began in 1982. Empire is essential but not as widely trusted as the Philly Fed because the Philly Fed covers more manufacturing in the US. Second, let’s see how it’s calculated: The general business conditions index and the indexes for the other 11 indicators are calculated by adding the percentage of "increase" responses and then subtracting the percentage of "decrease" responses. If 30% of survey respondents marked "increase," 50% chose "no change," and 20% picked "decrease," then the index would show a reading of 10. Index readings are released as absolute numbers to one place after the decimal point. With that said, let’s see what happened in the September survey. [Rude] Credit: [The Federal Reserve Bank of New York]( What’s interesting is that the red line (what’s expected in six months) is perpetually better than what the actual number is month to month. It seems like New York’s manufacturing managers are smoking the hopium. From [The Federal Reserve Bank of New York]( Business activity edged lower in New York State, according to firms responding to the October 2023 Empire State Manufacturing Survey. The headline general business conditions index fell seven points to -4.6. New orders fell slightly, while shipments were little changed. Unfilled orders declined, and delivery times shortened. Inventories held steady. Labor market indicators pointed to a slight increase in both employment and the average workweek. Here’s a summary of the numbers. [Rude] For whom and why does this matter? - Investors: The ESMI serves as an early indicator of manufacturing activity and economic health, aiding investors in making informed decisions. - Policy Makers: Armed with the insights from the ESMI, policymakers can tailor fiscal and monetary policies to foster a conducive environment for economic growth. - Academics and Economists: The index provides a rich dataset for academic inquiry, helping economists model and forecast economic trends. In short, we can see where things are and where policymakers and investors would like to take them. Next, let’s look at industrial production. [Forbes: AI Will Create First Trillionaires]( Bloomberg says AI will help investors make billions of dollars. But our research tells us that the kind of AI we cover in our [urgent AI briefing]( is going to do much better than that. Forbes says the new AI breakthroughs will not only save billions of lives …They could also create the world's first trillionaires. To learn more, [watch now.]( [Click Here To Learn More]( Today’s Industrial Production Expanding on manufacturing, industrial production includes mining and utilities. The Anatomy of Industrial Production Data - Components and Coverage: - Manufacturing: The largest component, encompassing the production of goods ranging from the behemoth machines that grace our skies to the minuscule silicon chips that power our modern lives. - Mining: My friend and colleague Byron King’s specialty, this sector includes the extraction of minerals and resources essential for many industries. - Utilities: The lifeblood of modern civilization, utilities cover the generation and distribution of electricity, gas, and water. - Calculations and Indices: Industrial production is often measured using an index where a particular year is used as the base year. The base year used now is 2017. [Rude] Credit: [FRED]( - Adjustments: Seasonal adjustments are often made to account for the variations that occur regularly at the same time each year—think of the surge in candy production before Halloween or the dip in car manufacturing during the festive season. - Capacity Utilization: Alongside the raw production data, capacity utilization figures are often released. This metric shows how effectively the industrial capacities are being used and is a significant indicator of economic health. We’ll expand on capacity utilization later. The Impetus Behind Monthly Reporting The cadence of monthly reporting isn’t arbitrarily chosen. It provides a near real-time snapshot, enabling a timely response from policymakers and the market. This frequency allows for a more agile approach to assessing the economic trajectory and making informed decisions accordingly. The Echoes of Industrial Production on Broader Economies The ramifications of fluctuations in industrial production reverberate far beyond the factory gates. A rise often heralds economic growth, increased employment, and buoyant consumer sentiment. Conversely, a decline could spell economic trouble, triggering a domino effect of reduced income, lowered spending, and tightening financial conditions. The market is looking for a slight 0.1% increase in industrial production for September, down from August’s 0.4% increase. Today’s Capacity Utilization In the realm of economic indicators, Capacity Utilization - Cap Ut: pronounced YOOT as in someone from Utah or My Cousin Vinny mispronouncing “youth” - stands as a stalwart sentinel, shedding light on the operational efficiency and economic health of a nation's industrial sector. It's a metric that highlights how effectively the existing infrastructural capacities are employed in manufacturing, mining, and utilities. As such, a deeper understanding of Capacity Utilization can offer a window into a nation's economic vigor and potential future trajectory. Cap Ut is calculated simply as Actual Output / Potential Output x 100. [Rude] Actual Output represents the actual production levels achieved by the industrial facilities. Potential Output denotes the maximum possible production levels achieved should all facilities operate at full throttle. If Cap Ut numbers are too hot, that could indicate a recession. But at 79%, that’s not a worry here. The market is looking for an unchanged number this month (79.7%). Today’s Retail Sales I just wanted to mention retail sales, as that comes out today as well. Economists are looking for a flat number of around 0.2%, down from last month’s 0.6%. If it surprises to the upside, Jay Powell may reconsider his rate hiking position. Wrap Up Today’s a busy one when it comes to economic numbers. I’m not sure how much impact it’ll have on the markets. We’ll need to wait and see. Have a great day! All the best, [Sean Ring] Sean Ring Editor, Rude Awakening X (formerly Twitter): [@seaniechaos]( [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your Rude Awakening e-mail subscription and associated external offers sent from Rude Awakening, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. We welcome comments or suggestions at feedback@rudeawakening.info. This address is for feedback only. For questions about your account or to speak with customer service, [contact us here]( or call (844)-731-0984. 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