As I elucidated two weeks ago (Is it Time to Buy Bonds?) and last week Bonds, Bitcoin and the Big Picture, I believe that bonds will be the ideal investment for 2023.
Why? Because a recession will be declared, inflation will subside, and the Fed and the Bank of Canada will do what they also do in a recession: cut interest rates.
Investors know it will happen, and they are betting with their money. It’s obvious when you look at the yield curve, which is now highly inverted:
- 10-year bond: 3.57%
- 6-month bond: 4.72%
That’s a 115 basis point inversion, and that’s massive.
By way of comparison, on May 2, 2022, the rates were:
- 10-year bond: 2.99%
- 6-month bond: 1.49%
That’s what you would expect: long rates higher than short rates. That is no longer the case.
So how do you bet on interest rates falling in 2023? You could play the futures market, or take the simple approach: buy a bond fund. Bond prices move opposite to interest rates, so if interest rates fall, bonds go up. As you know, my preferred ETF is the Ishares 20+ Year Treasure Bond ETF, ticker symbol TLT
Here’s the long-term trend in TLT:
As you can see, after a big spike into the pandemic, bonds have crashed, but we finally have a green candle on the monthly chart.
Last week I suggested that now is the time to begin assembling a position. It would appear that I was at least a week early, as the weekly chart indicates:
Early in the week looked good. Friday was a disaster, with TLT falling 2.6% in one day!
In my defense, I did say:
My strategy is to buy 20% of my expected position in TLT weekly over a five-week period. If the market believes interest rates will fall in the future TLT will continue to rise. If not, it falls. So, by the new year, I’ll have my position, and I’ll sit and hold it (and collect the dividend each month, currently yielding around 2.5% per year).
So, fortunately, I did not deploy all of my capital, so I can now average down and buy at a lower price, which I plan to do this week.
The Fed announces its rate decision this week. I expect a 50 basis point increase, just like in Canada last week. The number isn’t important, it’s the weasel words they use to describe it. If Chairman Powell says something like.”we expect the rate of increase in interest rates to moderate, ” then that will be our cue to ramp up our purchases of TLT.
That’s the plan. If I’m wrong, I believe the downside is limited, so I’m approaching this as a low-risk strategy to earn a nice return.
We’ll see how it goes.
Thanks for reading. See you next week.
Bonds: The Investment of 2023
by JDH on December 10, 2022
As I elucidated two weeks ago (Is it Time to Buy Bonds?) and last week Bonds, Bitcoin and the Big Picture, I believe that bonds will be the ideal investment for 2023.
Why? Because a recession will be declared, inflation will subside, and the Fed and the Bank of Canada will do what they also do in a recession: cut interest rates.
Investors know it will happen, and they are betting with their money. It’s obvious when you look at the yield curve, which is now highly inverted:
That’s a 115 basis point inversion, and that’s massive.
By way of comparison, on May 2, 2022, the rates were:
That’s what you would expect: long rates higher than short rates. That is no longer the case.
So how do you bet on interest rates falling in 2023? You could play the futures market, or take the simple approach: buy a bond fund. Bond prices move opposite to interest rates, so if interest rates fall, bonds go up. As you know, my preferred ETF is the Ishares 20+ Year Treasure Bond ETF, ticker symbol TLT
Here’s the long-term trend in TLT:
As you can see, after a big spike into the pandemic, bonds have crashed, but we finally have a green candle on the monthly chart.
Last week I suggested that now is the time to begin assembling a position. It would appear that I was at least a week early, as the weekly chart indicates:
Early in the week looked good. Friday was a disaster, with TLT falling 2.6% in one day!
In my defense, I did say:
So, fortunately, I did not deploy all of my capital, so I can now average down and buy at a lower price, which I plan to do this week.
The Fed announces its rate decision this week. I expect a 50 basis point increase, just like in Canada last week. The number isn’t important, it’s the weasel words they use to describe it. If Chairman Powell says something like.”we expect the rate of increase in interest rates to moderate, ” then that will be our cue to ramp up our purchases of TLT.
That’s the plan. If I’m wrong, I believe the downside is limited, so I’m approaching this as a low-risk strategy to earn a nice return.
We’ll see how it goes.
Thanks for reading. See you next week.