The Bond Markets – Social Distancing On Steroids

Originally published April 8, 2020

It has always been interesting to me how the media concentrates almost 100% on the equity markets. It is almost like the bond markets didn’t exist or, if they did, that it was on some far off planet that didn’t deserve anyone’s attention. I have always felt that this was very wrong headed thinking as the bond markets are integral to our Capital Markets and way larger than the equity markets.

I suppose that part of this is that they are not “fast money” entities. Bonds, in normal times, were “buy and hold” entities and so they didn’t illicit very much interest. However, as we all know, we are currently not in normal times and unlikely to return to that condition any day soon.

I make the comment today that bonds, now, are good for more than their position in the capital structure, meaning safer than equities, but also that some significant appreciation in bonds may be forthcoming as the markets calm down and begin to behave normally once again.

I think it is possible, quite possible, with some patience, that bonds may provide better returns than equities as we head into the balance of the year. You have to know what you are doing here, and you have to identify not only the companies backing the bonds but also the sectors of the markets that are likely to either decline or appreciate.

While virtually no one, it seems, has any focus on fixed income investments I think it is time, the right time, to bring them to your attention. Here is the data with the benchmark 10 year Treasury being at a 0.74% yield this morning.


U.S. Treasuries 0.625%

U.S. Corporate Bonds 3.386%

U.S. High Yield Bonds 9.509%

U.S. Municipal Bonds 2.146%

*Data according to Bloomberg

Just two months ago Corporate bond spreads were just 102 basis points higher than Treasuries. They have “social distanced” to 276 bps points in a very short period of time. This is not only worth noting but it is an event than can be used to your advantage. During the same time period High Yield bonds have gapped out from approximately 300 bps to 888 basis points now. Forget 6′, this is like 26′ of distancing as the cost of funding has ramped up and the appetite for riskier bonds has diminished.

There are specific bonds, of course, or mutual funds or ETFs though my sector of choice continues to be closed-end funds. It is possible to find monthly dividend payers, and yields that are not just low double digits but much higher now, as prices have declined here, along with the rest of the market but remember, lower prices equate to higher yields and, to be frank, some of the yields now, in this space, are just startling. Almost mind boggling really, though almost no one is focusing here, much less mentioning them in the Press.

Fine, I’ll take the “road less traveled” because that is often the road, I have learned in my more than four decades on Wall Street, that often provides the best returns. Travelling with the herd may be safer but is generally not the place to be if you want to capture outsize returns. Financially, in my view, there is “blood on the streets” and so take what advantage you may now before the “Street cleaners” arrive. Pun fully intended.

I also make the point, as with equities, that it is possible to buy specific bonds or mutual funds or ETFs or closed-end funds now, that you currently own, and average down in price and average up in yield. No one ever seems to think of this, or discuss this, so I am bringing it to your attention. In my opinion now, opportunity knocks, so please open the door.

I also mention Grant’s Rules, once again, to remind you of their importance.

Grant’s Rules 1-10

“Preservation of Capital”

Rule 11

“Make Money”

Rule 12

“When a company is under Federal investigation for Fraud—Sell.”

Rule 13

“When a company receives a “Going Concern” letter from its auditors—Sell.”

These Rules are always in force and they have served me well during all of my years on Wall Street. They may seem simple enough but, I can assure you, they were formulated from the multiple lashings that I have taken as I made my way down the Street and through countless financial debacles. The Rules are always important but now they are a shinning beacon that can lead you to the light at the end of our coronavirus pandemic for the markets.

The medical issues come first, of course, but a lot of pain and suffering is now taking place in the markets, all of the markets, and you can either hang your head or “seize the day.”

“Carpe Diem. Seize the day boys.”

– Robin Williams, The Dead Poets Society

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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