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Why This Investor Is Buying One of the Worst Performing Bonds in U.S. History


For about 25 cents on the dollar, Ben Mackovak, a Cleveland-based investor, is getting into what he considers one of the worst-performing Treasury bonds of all time.

This is the 30-year Treasury strip which matures on November 15, 2049 and was sold at a discount when it was first issued on November 15, 2019. The strips, which offer no interest payments, had a yield to maturity of more than 5% when Mackovak purchased them in October. They move closer to “par” or a par value of 100 cents on the dollar as they move toward maturity.

Bond investors have witnessed the worst bear market for Treasuries in U.S. history, with long-term government debt undermined by repeated selling since 2020 due to a combination of inflation and higher interest rates from the Fed, US economic strength and heavy borrowing from the Fed. US Treasury. That pushed 10- and 30-year yields to 16-year highs last month — moves that hit existing bondholders and gave new buyers like Mackovak attractive upside opportunities.

Read: Why bond market investors aren’t panicking in the face of the worst Treasury bear market in history

The 30-year Treasury bonds Mackovak purchased through a brokerage account — when the yield to maturity was 5.3% — were part of a careful calculation on his part. He is betting on a hard landing in the United States and a cut in interest rates from the Federal Reserve over the next two years, and he factors into his thinking what is called “convexity” – or the sensitivity of bond prices to changes in interest rates.

“My day job is not trading Treasuries, my job is investing in U.S. banks,” said Mackovak, 42, co-founder and managing member of Strategic Value Bank Partners, a fund company which oversees some $400 million in assets and manages four funds invested in community banks. He said he bought the 30-year Treasury notes, which now have 26 years left to mature, as a personal investment and they are his largest allocation outside of Strategic Value’s funds, although he refused to say to what extent.

“What I’m seeing from our involvement in the banking system is that things are slowing down,” he told MarketWatch by phone. “The beauty of this trade is that if there is a hard landing, this trade potentially makes a lot of money. And if not, you still get a positive real return. I don’t need to be 100% confident in making this trade due to the risk-reward ratio. I view it as a hedge of my exposure to stocks and other things.

There is no real cost to investing in the hedge, so “you are paid to wait because of the 5.3% yield to maturity, and you have the potential to earn 30 to 70% in the event of hard landing or fall in long-term rates. ,” he said. “My plan would be to use it as a hedge against stocks and falling stock prices, and I view it as a 12 to 24 month deal.”

The 30-year Treasury strip, which matures on November 15, 2049, was trading at about 50 cents when it was issued on November 15, 2019, according to Lawrence Gillum, a fixed-income strategist based in Charlotte, SC. North for brokers. LPL Financial dealer. Now at around 25 cents, the strip has essentially lost 50% of its discounted value since it was issued four years ago, according to Bloomberg data this week.

The strip is close to some of the worst-performing U.S. bonds of all time. The 30-year bond issued on August 15, 2020 and maturing in 2050 is down even more – about 61% – but “frankly, all the 30-year US Treasuries that were issued over the summer 2020 are down sharply. said Gillum.

Any investor who purchased the November 2049 Treasury coupon in 2019 would have lost approximately 50% on their investment. But because Mackovak bought it in October, he’s counting on the 5.3% yield to maturity to produce a risk-free positive real return after subtracting inflation, and said it has enough “resistance » to maintain trade even if the Fed raised rates. further away.

Bonds are generally considered solid ballast for the portfolios of any investor expecting a recession. Expectations of an economic slowdown tend to cause a flight of risky assets to the safety of U.S. government debt, driving up bond prices. The risk of potential losses is mitigated when strips are purchased cheaply, and an investor with a time horizon of one to two years can ride out any volatility without potential income or profit taking a big hit, said a director of fixed income. , who declined to be identified because he is not familiar with Mackovak’s trades.

According to Mackovak, all bonds trading at about a quarter of the dollar “should all behave the same.” “I wanted to pick a location and I was looking for the lowest par value, highest yield to maturity, and greatest convexity.”

“It seems more likely than not that we’re going to have a hard landing, but what I like about it is that even as we move forward, this investment still gives you a real, risk-free return in Treasuries, which is what you have. “I couldn’t have done it in 15-16 years. He said the real risk-free return would be around 2.3% or 3.3% before taxes, after subtracting an annual inflation rate of 2-3% from the yield to maturity of 5.3 %.

He’s not the only one who sees positive sides to bond market volatility. Jeff Sommer, a New York Times columnist who describes himself as a buy-and-hold investor, said trading Treasury bonds “can be dangerous.” Nonetheless, he recommends standard Treasury securities ranging from one-month bills to 30-year bonds, which “offer higher yields than investors have received in years” and, although there might be better opportunities to come, “it’s already the right time”. buy.”

Treasury strips are typically held in indexes or funds overseen by large companies, such as Pennsylvania-based Vanguard and California-based Pimco. But at current prices, Mackovak took the plunge because he believes the chances of him incurring losses are decreasing. “It takes larger and larger increases in interest rates to create mark-to-market losses on these bonds.”

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