Treasury Bonds: Shaken, Not Stirred

WTF is a Bond? I don’t know either let’s learn a little about them.

Last week, I talked about an intriguing alternative investment like Bitcoin. One known to be very volatile both on the upside and the downside. We talked about possibly giving it a consideration when considering what to add to the Lootbag in this fiscal year 2024. While Bitcoin may be exciting to talk about and might bring in the clicks, especially when Blackrock is going around being the spokesperson for it now, I thought it would be interesting to turn this week’s newsletter in a complete 180-degree turn and talk about the asset class that maybe isn’t as shiny as Bitcoin but definitely isn’t as dull as cash, and that is bonds and bond investing.

I want to bring up this new ratio of 80/10/10 that I am trying to shoot for in my own personal portfolio of all of my stocks and equities. 80% stocks, 10% bitcoin and 10% bonds. I think for someone my age, this is an appropriate allocation while taking risk into consideration. Having such a high percentage in stocks (especially US stocks due to historical returns) can be quite daunting, as short-term losses could be brutal in some years like 2022, which we experienced, but can also lead to very sizable gains in years like the last. 80% of the names you know, use, and you know are household names that will last at least 10 years. The other 20% of this ratio can be skewed to your preference and risk tolerance but here’s my pitch for bonds.. James— I’ll just stop there..

🧠 Bigger Ideas

❓What is a Bond anyways?

Bonds are debt securities that represent loans made by investors to governments or corporations. When you buy a bond, you are essentially lending money in exchange for periodic interest payments and the return of the principal amount at maturity. Investors consider bonds as part of their portfolio for various reasons, including income generation, diversification, and capital preservation. Different types of bonds exist, ranging from government bonds to corporate bonds, each with its risk and return profile.

The Yield Curve

The yield curve is a graphical representation of the interest rates on bonds of varying maturities. It typically slopes upward, reflecting that longer-term bonds have higher yields than shorter-term bonds. The shape of the yield curve provides insights into economic conditions and can influence investment decisions. A normal yield curve suggests a healthy economy, while deviations can signal potential economic changes. We’ve been experiencing an inverted yield curve since March 2023 since the Federal Reserve decided to change it's interest rate policy due to inflation. This has caused shorter term yields to essentially sky rocket as market health was unknown.

The 2-year and 10-year Treasury yield spread is a widely watched indicator that reflects the difference between the yields on 2-year and 10-year U.S. Treasury bonds. It can influence decisions related to bond duration and asset allocation. Changes in the 2yr-10yr spread can signal shifts in market expectations regarding future interest rates. A widening spread might indicate expectations of higher future rates, while a narrowing spread may suggest expectations of lower future rates. If this plays out the way it’s currently trending on that 2yr/10yr spread there above then I think we might end up seeing the “bull steepener”.

Recognizing scenarios like the bull steepener can guide investment decisions, and assets like $TLT can be influenced by changes in interest rates and the shape of the yield curve, making them important considerations in a diversified portfolio. An asset like $TLT's performance is linked to the flattening of the yield curve. When interest rates decline, the yields on longer-term bonds become relatively more attractive, resulting in an increase in their prices. So the curve un-inverting would be good for the bond market and something to keep an eye on if you are wanting to reach more cookies in that diversified cookie jar. Why bet on the Nasdaq every year? Take a breather one year.. maybe?

🎨 My Chart Artwork(s) of the Week

🖼️ The Art Gallery

If you are more of a risk-averse player in this game and think the stock market is not for you, then maybe this is more up your alley, as they say. Some people just never get the right timing on stocks, and that just might be your luck, and so be it - bet on the US government then - disregard however you might feel about them you can’t deny that we know capitalism the best out of all of the countries. Bet on the country, when has that gone wrong? Bet on mean reversion. This is a very low risk option in my opinion. This is coming from someone who tried to be a hero and save First Republic Bank, sold Nvidia for $187.. (I’ll never forget that number), and someone who has 80%+ accumulated in what most financial advisors would call risky assets (stocks). That last chart in this gallery is something that I’ll be watching to see if the group collectively trends upward. $ZROZ launch point in my eyes is $110.. let’s see though.

Short edition of the newsletter this week as we have a short week this week in the markets. Bank earnings kicked off earnings season this past Friday looking forward to this week as some of the $KRE constituents start reporting earnings. Let’s see if that lower interest rate narrative starts gaining more steam.. See ya next week! ✌🏽