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UK and US Inverted Yield Curves and Bond Funds

Interest-Rates / Inverted Yield Curve Oct 01, 2023 - 10:12 PM GMT

By: Nadeem_Walayat

Interest-Rates

Yield Curves

At the late 2021 peak of the stock market the US short end yield was zero, long end (20 year) at about 2%. so the yield curve was normal. By the time of the bear market low was starting to invert, with the short end 3.5% vs long end 3.8%, fast forward to day we have the short end at 5.5%, Whilst most recent yield action has seen the short end and the long end nudge higher, hence offering an opportunity to accumulate near the bond markets lows.


In terms of price volatility one seeks the longer end i.e. 10year and 20 year, as the short dated bond funds are not going to be volatile enough in terms of price, whilst there may be some that have been but that would be as a function of fund manager incompetence so unlikely to see any recovery.

The bottom line is that as we have seen over the past month (green vs blue) US yields should continue to nudge higher across the curve and thus allow one to accumulate as bond prices drift lower. We will only know the yield junctures with the benefit of hindsight but given the amount of debt that the US accruing I doubt we are going to see the 30 year rise from 4.21% to 5.5% as Ackman espouses.

Whilst the UK is forced to play follow the Fed lower despite having a much weaker economy that lends it self to earlier and deeper cut in yields, in fact the UK yield curve is already showing strong signs of responding to this which is why I have been iterating target bond funds for some weeks. For instance back in October 2022 as soon as I saw that Bond market was collapsing I tried to buy GILTS both via II.co.uk and AJ Bell and neither would let any orders go through, the market had effectively been frozen. Though I am sure it would have been possible to buy bond funds at the time had I then taken the time to look deeper into bonds.

So the range of target bonds are UK and US 10 year and 20yr.

IBTM.L
IBTL.L
GILTL
3GIL

Why did I pick these bond funds listed on the LSE, primarily because they can be bought within tax free wrappers such as ISA's and SIPPs, yes I know GILTS are free of capital gains tax but I don't want to invest in individual illiquid bonds. Still GILTS can prove useful for UK investors OUTSIDE of tax free wrappers.

Bottom line rates have been capped by Fed Wizard of Oz via smoke and mirrors such as the reverse repo balance that is now being drawn on to depress yields as the US treasury floods the markets with over $1 trillion of bonds over the coming months, soon to be accompanied by QE to suppress the yield curve which is why all those fantasising about yields soaring to the likes of the late 1970's are going to be proven wrong. The higher the debt burden the lower the yield! Ackman says 30 year yield will trade to 5.5%, more like 3.5% if not lower!

And then there is the SAFE HAVEN element of US bonds and UK bonds to a lesser degree, everyone appears to have forgotten that there is a banking crisis underway which is why the Fed reversed QT in March and effectively announced a blanket guarantee for all depositors regardless of size to prevent a run on the banks!

This is the problem with the banking crime syndicate and is a function of the quadrillion derivatives market where bets are piled on top of best piled on top of bets, we don't know where the problem is until the banks start to implode! The banks gamble and then lose and the Tax payer steps in to bail them out resulting in perpetual counter party risk that encourages fund flows into the safest asset, US bonds. Though cash flow rich AI tech stocks as we have witnessed this year are also a safe haven!

Government bonds are a safe haven and given that we are heading into a recession, and given that rates are high, hence yields should drop. Of course as occurred September 2022, there is the risk of volatility in bond markets as well. There in lies the risk vs reward, there cannot be the potential for a 50% reward without any risk, if can not stomach any risk then just park your funds in a money market account and let inflation erode it's value,

Thus as I have already mentioned for several weeks I settled on these 4 bond funds that offer varying risk vs reward over a 2-4 year time frame. Yes it will have to be bond funds rather than actual bonds which tend to be illiquid, 2 UK bond funds and 2 US bond funds that as combined portfolio I seek a 50% return from over 2-4 years, which is pretty good considering these are bonds and not stocks!

This article is excerpted from my extensive analysis Inflation Bond Fire of the Vanities Breeds Opportunity that was first made available to Patrons who support my work. So for immediate first access to ALL of my analysis and trend forecasts then do consider becoming a Patron by supporting my work for just $5 per month, lock it in now at $5 as this will soon rise to $7 per month for new sign-ups. https://www.patreon.com/Nadeem_Walayat.

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S&P

Targeting 4600 Mid Summer 2023 Top followed by correction to below 4150 into October 2023.

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Your trimmed the FOMO to buy the Dip analyst.

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2023 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 30 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Housing Markets Forecast 2014-2018The Stocks Stealth Bull Market 2013 and Beyond EbookThe Stocks Stealth Bull Market Update 2011 EbookThe Interest Rate Mega-Trend EbookThe Inflation Mega-trend Ebook

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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