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U.S. Treasury Bonds (As of the November 25, 2022, Close)
| Maturity | Yield |
| T 4 ½ 11/30/24 | 4.453% |
| T 4 ½ 11/15/25 | 4.199% |
| T 3 ⅞ 11/30/27 | 3.858% |
| T 3 ⅞ 11/30/29 | 3.773% |
| T 4 ⅛ 11/15/32 | 3.678% |
| T 4 11/15/42 | 3.951% |
| T 4 11/15/52 | 3.733% |
*Data provided by Bloomberg
Let me start by presenting some data. Our bond markets are going through a massive change at present, and yet, little has been said about it. This is all being caused by the Fed, as you might imagine. In fact, much of the focus for our upcoming week will be focused on Jerome Powell’s speech on Wednesday, November 30, at 1:30 PM ET at the Brookings Institution.
You will note above the yield curve inversion, as the 2-year Treasury has the highest yield of any maturity at present. The 2-year now yields 77 basis points more than the 10-year and 72 basis points more than the 30-year Treasury. Given the cost and risks of duration, this is a clear signal, in my view, of where to put fixed income money now. We are also always looking at the spreads in the secondary bond markets, but the spread to what is now a serious consideration.
| Security | Last 30 Days | Year-to-Date |
| U.S. Treasuries | +2.03% | -12.28% |
| IG Corporate Bonds | +4.83% | -15.43% |
| HY Corporate Bonds | +1.72% | -10.65% |
| MBS Bonds | +3.27% | -11.48% |
| Municipal Bonds | +4.16% | -9.32% |
*Data provided by Bloomberg
The bond markets, in my view, are setting themselves up for additional but lesser hikes in interest rates, with some kind of hoped-for “pivot” coming in 2023. From my perspective, I would stay relatively short in your purchases for now and take advantage of spreads off the 2-year Treasury. Both the duration risk and the credit risk would be minimized by this strategy. Then, once the Fed begins to actually “pivot,” you can move to longer maturities to pick up additional yield as the yield curve swings to a more normal cycle.
The other point of note here is that IG Corporates are leading the charge in spread now. They are the quickest turn in the major bond markets. Something to keep in mind.
One other consideration now is the Agency markets. The spreads are abnormally wide to Treasuries now, and they may be a decent substitute for other classes of bonds in your portfolios. I especially like the step-up Agencies, as this gives you some additional protection against how the Fed is actually going to play out their battle with inflation. Some of you, of course, are concerned about the calls, but a called bond also gives you the opportunity to invest the money at the rates at that time, and in our current environment, that is less of a problem, in my opinion, than when the bond markets are functioning in their normal condition.
This is neither the best of times nor the worst of times, but it is a time that is an abnormality.
The Fed is controlling the roll of the dice – and fighting the Fed, I can assure you, is a very large mistake. You can forget about fighting City Hall. The Fed has a much bigger stick.
“Whoever controls the volume of money in any country is absolute master of all industry and commerce.”
– James A. Garfield, President of the United States
Original Source: Author
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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