2023... The Great Rotation?

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BoomBustInvest
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2023... The Great Rotation?

Post by BoomBustInvest »

Quite a few investment managers and analysts are singing the praises of investment-grade corporate bonds citing a decent probability that they will deliver equity-like returns going forward.

With a potential slowdown/recession starting in 2023 and possibly dragging into 2024, could we see a 'great rotation' from equities into this type of bonds? Particularly if earnings start to disappoint?
(Already in January in the US the big banks have reported quite sizeable drawdowns in earnings)
livesoft
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Re: 2023... The Great Rotation?

Post by livesoft »

Definitely maybe. What are your concerns?
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DoctorE
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Re: 2023... The Great Rotation?

Post by DoctorE »

5%pa nominal on USD investable grade now so what would the upside come from? drop in interest rates?
frugalecon
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Re: 2023... The Great Rotation?

Post by frugalecon »

Maybe yes, maybe no. We’ll know by the end of the year.
Topic Author
BoomBustInvest
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Re: 2023... The Great Rotation?

Post by BoomBustInvest »

livesoft wrote: Fri Jan 20, 2023 5:41 pm Definitely maybe. What are your concerns?
Portfolio allocation or the coming year. Just seeing if anyone else thinks there will be rotation out of equities into bonds and if they see investment grade corporate bonds as a decent hedge in a potential downturn over the next year or so as a number of investment manager's are saying (Goldman Sachs, Aegon etc)
Topic Author
BoomBustInvest
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Re: 2023... The Great Rotation?

Post by BoomBustInvest »

DoctorE wrote: Fri Jan 20, 2023 7:03 pm 5%pa nominal on USD investable grade now so what would the upside come from? drop in interest rates?
... yes... along with a broad-based re-allocation from equities into now discounted bond prices
DoctorE
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Re: 2023... The Great Rotation?

Post by DoctorE »

BoomBustInvest wrote: Sat Jan 21, 2023 6:25 am
DoctorE wrote: Fri Jan 20, 2023 7:03 pm 5%pa nominal on USD investable grade now so what would the upside come from? drop in interest rates?
... yes... along with a broad-based re-allocation from equities into now discounted bond prices
Expecting bond prices move on more buying demand not just on interest rate & credit risk?
Surely rational investors would not bid up prices of investment grade bonds (decreasing yields) if they can get more from treasuries who's prices are determined by the Fed Fund rate and inflation expectations.
Soon2BXProgrammer
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Re: 2023... The Great Rotation?

Post by Soon2BXProgrammer »

BoomBustInvest wrote: Fri Jan 20, 2023 5:37 pm Particularly if earnings start to disappoint?
How bad do earnings have to be before bond yields rise (causing the bonds you hold to fall in value), because companies profitability is suffering and the investment grade bonds become "Fallen Angels" due to credit downgrades?
Earned 40 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
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whodidntante
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Re: 2023... The Great Rotation?

Post by whodidntante »

Soon2BXProgrammer wrote: Sat Jan 21, 2023 6:42 pm
BoomBustInvest wrote: Fri Jan 20, 2023 5:37 pm Particularly if earnings start to disappoint?
How bad do earnings have to be before bond yields rise (causing the bonds you hold to fall in value), because companies profitability is suffering and the investment grade bonds become "Fallen Angels" due to credit downgrades?
It's not really earnings so much as the deteriorating financial condition of the company as judged by an agency. The review process is opaque.

The fallen angel anomaly has a great story, though. It happens because many investment managers operate under rules to limit corporate bond investments to investment-grade bonds. So the yield will be temporarily higher than it "should" be post-downgrade, assuming the company is not a dumpster fire. Of course, some very rich and skilled people know this, not just you. So I'm not sure if an individual investor finds much meat on the bone. But it still makes a great story.
Soon2BXProgrammer
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Re: 2023... The Great Rotation?

Post by Soon2BXProgrammer »

whodidntante wrote: Sat Jan 21, 2023 7:00 pm
Soon2BXProgrammer wrote: Sat Jan 21, 2023 6:42 pm
BoomBustInvest wrote: Fri Jan 20, 2023 5:37 pm Particularly if earnings start to disappoint?
How bad do earnings have to be before bond yields rise (causing the bonds you hold to fall in value), because companies profitability is suffering and the investment grade bonds become "Fallen Angels" due to credit downgrades?
It's not really earnings so much as the deteriorating financial condition of the company as judged by an agency. The review process is opaque.

The fallen angel anomaly has a great story, though. It happens because many investment managers operate under rules to limit corporate bond investments to investment-grade bonds. So the yield will be temporarily higher than it "should" be post-downgrade, assuming the company is not a dumpster fire. Of course, some very rich and skilled people know this, not just you. So I'm not sure if an individual investor finds much meat on the bone. But it still makes a great story.
Sorry I wasn't clear... I was trying to point out that it's impossible to predict what was going to happen.
Earned 40 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
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whodidntante
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Re: 2023... The Great Rotation?

Post by whodidntante »

Soon2BXProgrammer wrote: Sat Jan 21, 2023 7:05 pm
whodidntante wrote: Sat Jan 21, 2023 7:00 pm
Soon2BXProgrammer wrote: Sat Jan 21, 2023 6:42 pm
BoomBustInvest wrote: Fri Jan 20, 2023 5:37 pm Particularly if earnings start to disappoint?
How bad do earnings have to be before bond yields rise (causing the bonds you hold to fall in value), because companies profitability is suffering and the investment grade bonds become "Fallen Angels" due to credit downgrades?
It's not really earnings so much as the deteriorating financial condition of the company as judged by an agency. The review process is opaque.

The fallen angel anomaly has a great story, though. It happens because many investment managers operate under rules to limit corporate bond investments to investment-grade bonds. So the yield will be temporarily higher than it "should" be post-downgrade, assuming the company is not a dumpster fire. Of course, some very rich and skilled people know this, not just you. So I'm not sure if an individual investor finds much meat on the bone. But it still makes a great story.
Sorry I wasn't clear... I was trying to point out that it's impossible to predict what was going to happen.
Gotcha.
Ed 2
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Re: 2023... The Great Rotation?

Post by Ed 2 »

BoomBustInvest wrote: Fri Jan 20, 2023 5:37 pm Quite a few investment managers and analysts are singing the praises of investment-grade corporate bonds citing a decent probability that they will deliver equity-like returns going forward.

With a potential slowdown/recession starting in 2023 and possibly dragging into 2024, could we see a 'great rotation' from equities into this type of bonds? Particularly if earnings start to disappoint?
(Already in January in the US the big banks have reported quite sizeable drawdowns in earnings)
I hear this all along for the last six months already. So what anyone doesn’t know already? Remember, market reacting on unexpected short term . Long term this is all noise. All this we hear and see on financial porn network 24/7 from the “ successful fund manager’s “. Just keep investing into index funds and be done with it.
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel
Valuethinker
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Re: 2023... The Great Rotation?

Post by Valuethinker »

BoomBustInvest wrote: Fri Jan 20, 2023 5:37 pm Quite a few investment managers and analysts are singing the praises of investment-grade corporate bonds citing a decent probability that they will deliver equity-like returns going forward.

With a potential slowdown/recession starting in 2023 and possibly dragging into 2024, could we see a 'great rotation' from equities into this type of bonds? Particularly if earnings start to disappoint?
(Already in January in the US the big banks have reported quite sizeable drawdowns in earnings)
Remember that corporate bond fund managers had a torrid time in 2022. It's not like they can switch their investments to equity. They have a vested interest in saying "it's over".

Credit spreads won't come in (ie drop ie prices of corporate bonds rise faster than comparable safe govt benchmark bonds) until the market thinks the interest rate cycle has turned - Central Banks ease on interest rate rises.

And that also assumes that the speed of tightening, which has been dramatic, doesn't cause recessions. Although the bond market will anticipate the recovery, it won't decisively turn until it thinks that default risk is diminishing in the future.

It's been an awful year for corporate bonds. My worst performing funds are sterling corporate bond funds-- double whammy of interest rate risk (PM Liz Truss' abortive 44 day premiership) and credit risk. By rights, they should do better. But interest rate risk remains - as CBs exit Quantitative Easing. And so do recession risks. I have no idea whether that is "in the price".

Credit and default risk tend to lag bad economy, I think. It takes a while for all of the concealment to drop away - the wreckage left on the beach as the tide goes out.

If we are truly turning a corner, I'd rather be in equities. When the wind is behind them, they can really zing.
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