David Tepper Halts Bond Collapse… For Now
According to hedge fund manager David Tepper during a CNBC interview earlier this week, Treasury securities' selling is over for the time being.
In a report of the interview on Yahoo Finance, Tepper stated that it is difficult to be bearish on stocks and that U.S. Treasury selling is over. As said in the article, the billionaire investor is widely followed thanks to his making a fortune buying bank stocks after the financial crisis.
Regarding why he believes rates have reached a short-term peak, Tepper said that while Japan has been a net seller of treasuries over the last several years, they may be enticed to become a buyer.
Does that theory hold water? It certainly sounds impressive, and I highly doubt many in the CNBC audience will fact check the billionaire, but I’m not convinced.
Japan sells Treasury securities for many reasons, mostly related to the U.S. rate collapse. Also, Japanese investors have slowly warmed to taking risk, and it appears they’re looking to participate in the global growth story developing over the last decade.
With Japan having led the way to zero bank rates, investors there have long preferred the haven of U.S. Treasuries. Even after factoring for currency risk hedges, those long Treasuries were netting 0.3% on the trade, according to a mid-2018 article on ThinkAdvisor. The 10-year Japanese Government Bond at the time was essentially zero, making this low-risk trade easy money.
The returns were higher for those making this carry trade before mid-2018 when Treasury yields were higher. With the collapse in Treasury yields, this trade no longer worked.
At the time of the ThinkAdvisor article, the 10-year U.S. Treasury was yielding 2.83%. Today the 10-year is at 1.54%. My question is: why does Tepper believe Japanese demand will suddenly reemerge?
I believe Tepper may be doing what we often accuse hedge fund managers of doing: talking up their book. How he is positioned is anyone’s guess, but a continued rash of selling in the Treasury market could certainly be bad for both bonds and stocks, and that could be bad for Tepper.
A cynic might say Tepper went heavily long stocks and U.S. Treasuries, knowing that he could move the market with his CNBC interview. Such is the nature of the financial media game and why we always say to ignore the chatter.
Indeed, the Treasury bond market is experiencing a world of hurt. So far in 2021, the iShares 20+ Year Treasury Bond ETF is down over 10% for the year, but the bond market is much more than just Treasury securities.
Given both the monetary and fiscal stimulus in the economy, junk bond rates have been relatively insulated from the selling we see in the Treasury market. Compared to the 20+ Year Treasury ETF, the SPDR High Yield Bond ETF is down just over 1% for the year.
The concept of convexity potentially explains that: A growing economy will typically support lower quality bond issuers.
Nobody can predict the future, which is why we customize portfolios for our clients based on their specific needs. Doing so with individual bonds gives us maximum flexibility no matter what transpires in the market.
If you would like to learn more about our views on bonds and future interest rates, please give us a call. I look forward to hearing from you!