iShares 20+ Year Treasury Bond ETF

‘T-bill and chill’: Why Jack Bogle’s strategy of ‘lazy’ investing is making a comeback

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Jack Bogle

Mark Lennihan | AP

Boring investing is making a comeback.

With the meme-stock rally in the rearview mirror and interest rates surging, individual investors are rediscovering the philosophy made famous by Vanguard’s founder, Jack Bogle. The father of market indexes preached low-cost, passive investments that compound over years. Fans call themselves “Bogleheads,” and the strategy “lazy” investing.

They’re well positioned for the current market. Timing has proved difficult this year, with eight days accounting for all of the S&P 500’s gains, according to DataTrek. Higher rates have slammed tech and growth stocks, which dominated retail traders’ portfolios during the pandemic. GameStop, the original meme trade, is down roughly 85% from its all-time high.

Dan Griffin, a self-proclaimed Boglehead based in Florida, said he watched the meme stock rally in amusement. The current market condition is proof that his “tortoise” investing approach is the right one to building long-term wealth, he said.

“It’s a little bit of vindication,” Griffin told CNBC. “I’m happy to be the boring investor, I’m happy to be the tortoise. While the hare does win sometimes, the tortoise more often than not, is going come out ahead.”

Christine Benz, a director of personal finance and retirement planning for Morningstar, said investors are gravitating towards higher yields right now to capture value — another core principle of the Bogleheads.

“Bogleheads are investing for the very long haul — the idea is that you’re putting money into your account and just adding to it, maybe not touching it or looking at it for another 30 years,” she said. “The meme stock phenomenon seemed so focused on being incredibly plugged into your portfolio and monitoring your investments — I see the Bogleheads’ philosophy as being antithetical to all of that.”

Wall Street Bets to Bogleheads

Brokerage firm Robinhood, once synonymous with day trading, is seeing a similar pivot to higher yields and longer-term thinking.

The company launched retirement accounts this year, and offers 3% back on cash as it tries to diversify away from slumping trading fees. Robinhood’s co-founder and CEO Vlad Tenev told CNBC that investors have been moving into cash, money market funds and bond ETFs. He noted more chatter in Bogleheads’ Reddit group, versus the infamous Wall Street Bets.

“One of the really interesting things that we’ve seen over the past couple of months is Robinhood being mentioned, and discussed in these traditional passive investing forums, like Bogleheads on Reddit,” Tenev said. “People are building long-term portfolios on Robinhood, taking advantage of the better economics and the tools to do that.”

Bond ETFs are one way retail investors have tried to capture rising interest rates. The SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) was the third most-bought name last week after the Invesco QQQ Trust (QQQ) and SPDR S&P 500 ETF (SPY), according to Vanda Research. It saw the largest single-day of net inflows to the ETF since the firm began measuring it almost a decade ago.

“Clearly, income-seeking retail investors are taking advantage of the new high-rate regime, which had been missing from the investment landscape since the pre-GFC [Great Financial Crisis] years,” Marco Iachini, senior vice president of Vanda Research, said in a note to clients. “Some are calling it ‘T-Bill and chill.’”

Younger investors are even more exposed to fixed income compared to their older counterparts. In its annual study, Schwab Asset Management shows millennial ETF investors have 45% of their portfolios in fixed income — compared to 37% for Generation X. The survey showed 51% of millennials plan to invest in bond ETFs next year, compared to 40% of baby boomers.

While far from a meme stock, the move to fixed income could still be risky.

The iShares 20+ Year Treasury Bond ETF (TLT), has seen $19.8 billion in assets flood in this year, according to BlackRock. If yields go up, funds like TLT will suffer — since bond yields move inversely to prices. That’s been the case this year, with TLT down about 50% from its record high. On the other hand, if yields fall, bond funds should outperform.

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November 10, 2023

Homes are expensive right now, but these mortgage bonds look cheap

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U.S. homes may be wildly unaffordable for first-time buyers, but mortgage bonds backed by those same properties could be dirt cheap.

Shocks from the Federal Reserve’s dramatic rate increases have walloped the $8.9 trillion agency mortgage-bond market, the main artery of U.S. housing finance for almost the past two decades.

Spreads, or compensation for investors, have hit historically wide levels, even through the sector is underpinned by home loans that adhere to the stricter government standards set in the wake of the subprime-mortgage crisis.

Bond prices also have tumbled, sinking from a peak above 106 cents on the dollar to below 98, despite guarantees that mean investors will be fully repaid at 100 cents on the dollar.

From $106 to $98 cents, agency mortgage-bond prices are falling.

Bloomberg, Goldman Sachs Global Investment Research

“It’s really, really struggled,” Nick Childs, portfolio manager at Janus Henderson Investors, said of the agency mortgage-bond market during a Thursday talk on the firm’s fixed-income outlook.

Yet Childs and other investors also see big opportunities brewing. While mortgage bonds have gotten cheaper with the sector’s two anchor investors on the sidelines, the stalled housing market should breed scarcity in the bonds, which could help lift the sector out of a roughly two-year slump.

Prices have tumbled since rate shocks hit, but also since the Fed continued winding down its large footprint in the sector by letting bonds it accumulated to help shore up the economy roll off its balance sheet.

Banks awash in underwater securities have pulled back too. The repricing of similar bonds helped hasten the collapse of Silicon Valley Bank in March.

“Banks have been not only absent, but selling,” said Childs, who helps oversee the Janus Henderson Mortgage-Backed Securities exchange-traded fund
JMBS,
an actively managed $2 billion fund focused on highly rated securities with minimal credit risk.

“But we’re moving into an environment where supply continues to dwindle,” he said, given anemic refinancing activity and the dearth of new home loans being originated since 30-year fixed mortgage rates topped 7%.

The bulk of all U.S. mortgage bonds created in the past two decades have come from housing giants Freddie Mac
FMCC,
+0.66%,
Fannie Mae
FNMA,
+1.09%
and Ginnie Mae, with government guarantees, making the sector akin to the $25 trillion Treasury market. But unlike investors in Treasurys, investors in mortgage bonds also earn a spread, or extra compensation above the risk-free rate, to help offset its biggest risk: early repayments.

While homeowners typically take out 30-year loans, most also refinanced during the pandemic rush to lock in ultralow rates, instead of continuing to make three decades of payments on more expensive mortgages. If someone refinances, sells or defaults on a home, it leads to repayment uncertainty for bond investors.

“To put this another way, the biggest risk to mortgages is now off the table, yet spreads are at or near historic wides,” said Sam Dunlap, chief investment officer, Angel Oak Capital Advisors, in a new client note.

That spread is now far above the long-term average, topping levels offered by relatively low-risk investment-grade corporate bonds.

Agency mortgage bonds are offering far more spread that investment-grade corporate bonds. But these mortgage bonds will fully repay if borrowers default.

Janus Henderson Investors

Agency mortgage bonds typically are included in low-risk bond funds and can be found in exchange-traded funds. While they have been hard hit by the sharp selloff in long-dated Treasury bonds
BX:TMUBMUSD10Y

BX:TMUBMUSD30Y,
there has also been hope that the worst of the storm could be nearly over.

Goldman Sachs credit analysts recently said they favored the sector but warned in a weekly client note that it still faces “high rate volatility and a dearth of institutional demand.”

As evidence of the U.S. bond selloff, the popular iShares 20+ Year Treasury Bond ETF
TLT
recently sank to its lowest level in more than a decade. It also was on pace for a negative 10% total return on the year so far, according to FactSet. Janus Henderson’s JMBS ETF was on pace for a negative 2.7% total return on the year through Friday.

“Frankly, why they fit portfolios so well is that because the government backs agency mortgages, there is no credit risk,” Childs said. “So if a borrower defaults, you get par back on that. It just comes through as a typical payment.”

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October 13, 2023

Stocks end mostly higher Monday despite resumed U.S. debt selloff

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Stocks closed mostly higher to kick off October as a sharp selloff in longer-dated U.S. government debt resumed. The Dow Jones Industrial Average
DJIA,
-0.22%
fell about 74 points, or 0.2%, ending near 33,433, according to preliminary FactSet data. The S&P 500 index
SPX,
+0.01%
ended flat at 4,288, while the Nasdaq Composite Index
COMP,
+0.67%
gained 0.7%. Surging long-term borrowing costs remain a key focus in the final quarter of 2023, with the fear being they could derail the U.S. economy and spark more corporate defaults. The benchmark 10-year Treasury yield was punching higher to about 4.682% on Monday. Evidence of the debt rout could be found in the popular iShares 20+Year Treasury Bond ETF,
TLT,
-1.98%
which cemented its lowest close since since August 2007 and in the iShares Core U.S. Aggregate Bond ETF,
AGG,
-0.70%
which finished at its lowest since October 2008, according to Dow Jones Market Data. Investors in short U.S. government T-bills, however, have been mostly insulated from recent volatility, with yields steady in the 5.5% range, according to TradeWeb data.

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October 2, 2023

How 10-year Treasurys could produce 20% returns, according to UBS

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Carnage in the bond market in September could tee up an opportunity for investors to earn big returns on U.S. government debt in a year.

Owners of 10-year Treasury
BX:TMUBMUSD10Y
notes at recent yields of around 4.5% could reap up to 20% in total returns in a year if the U.S. economy stumbles into a recession, according to UBS Global Wealth Management.

The key would be for U.S. debt to rally significantly as investors scramble for safety in the roughly $25 trillion treasury market.

“U.S. yields remain well above long-term equilibrium levels, providing scope for them to fall as the macroeconomic outlook becomes more supportive for bonds,” a team led by Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management, wrote in a Friday client note.

Their base-case call is for the 10-year Treasury yield to fall to 3.5% in 12 months, with it easing back to 4% in an upside scenario for growth, and for the economy’s benchmark rate to tumble as low as 2.75% in a downside scenario of a U.S. recession.

“That would translate into total returns over the period of 14% in our base case, 10% in our upside economic scenario, and 20% in our downside scenario.”

See: The market ‘may be overpaying you’ on a 10-year Treasury, says Lloyd Blankfein

A rally in Treasury debt could help boost funds that track the Treasury market and the broader U.S. bond sector. The popular iShares 20+ Year Treasury Bond ETF
TLT
was down 10.9% on the year through Friday, while the iShares Core U.S. Aggregate Bond ETF
AGG
was 3% lower, according to FactSet.

A tug of war has been developing in the Treasury market, with fear gripping investors this week as bond yields spike in the wake of signals last week from the Federal Reserve that interest rates may need to stay higher for longer than many on Wall Street anticipated.

“Bond vigilantes” unhappy about the U.S. deficit have been demanding higher yields, while households and hedge funds have been piling into Treasury securities since the Fed began raising rates in 2022.

Much hinges on how painful things get if rates stay high, which would ratchet up borrowing costs for households, companies and the U.S. government as the Fed works to get falling inflation down to its 2% target.

Hedge-fund billionaire Bill Ackman this week said he thinks Treasury yields are going higher in a hurry, as part of his bet that the 30-year Treasury yield
BX:TMUBMUSD30Y
has more room to climb.

The 10-year Treasury edged lower to 4.572% on Friday, after adding almost 50 basis points in September, which helped the stock market reclaim some lost ground in a dismal month, while the 30-year Treasury yield pulled back to 4.709%, according to FactSet.

The Dow Jones Industrial Average
DJIA
posted a 3.5% decline in September, its biggest monthly loss since February, the S&P 500 index
SPX
fell 4.8% and the Nasdaq Composite Index
COMP
shed 5.8% for the month.

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October 1, 2023

Dow falls 160 points Friday, S&P 500 posts worst monthly drop since December

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Stocks closed mostly lower on Friday, with the S&P 500 cementing its biggest drop in a month since December, as a surge in bond yields knocked the wind out of this year’s rally in equities. The Dow Jones Industrial Average
DJIA,
-0.47%
fell about 157 points, or 0.5%, ending near 33,508, according to preliminary FactSet data. The S&P 500 index
SPX,
-0.27%
shed 0.3% and the Nasdaq Composite index
COMP,
+0.14%
gained 0.1%. September was the worst month for the Dow since February, with its 3.5% loss, while the S&P 500 shed 4.9% and the Nasdaq lost 5.8%, marking their worst months since December 2022, according to Dow Jones Market Data. Yearly core inflation edged higher in August, according to Friday’s release of the latest PCE price index. The focus over the weekend will likely be a U.S. government shutdown. Given the negative backdrop for markets, the S&P 500, Dow and Nasdaq all booked declines in the third quarter.

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September 29, 2023

Treasury Yields Are Headed Even Higher. Stocks Won’t Like It.

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Treasury Yields Are Headed Even Higher. Stocks Won’t Like It.

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September 23, 2023

This bond ETF is a bet on ‘higher for longer’ and uses options to find extra income

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August 11, 2023

Many investors are betting on an inflation peak. Here’s why a former hedge-fund manager says they’re wrong.

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Investors are waking up to big trouble in big China. Stock futures and oil prices are falling after angry anti-COVID zero protests swept the country.

“This is a sudden powerful new distraction for markets when this week was supposed to be about incoming U.S. data,” sum up strategists at Saxo Bank. They say watch companies exposed to China, “given forward earnings are likely to be downgraded following further China lockdowns and protests.”

Before China grabbed the spotlight, holiday weekend sales, jobs and inflation data that due this week, as well as remarks by Fed Chairman Jerome Powell were the big focus.

Other questions are now swirling. Will China-related falls in oil prices lend to the peak inflation theory? And what about China’s post-COVID economic rebirth?

Onto our call of the day, which says it’s time to short long bonds because of sticky food inflation — thanks to China. It comes from Russell Clark, a former hedge-fund manager who has spent the last 20 years focusing on that market, macro and short selling.

He notes investors have been scooping up the the iShares 20 years+ Treasury Bond ETF
TLT,
-0.34%,
a liquid exchange-traded fund that buys long-dated bonds, even as with U.S. inflation hovering at 1970 highs.

“The reason that people are getting bullish bonds I believe is that the yield curve has inverted. And every time that has happened, you have a recession and you want to get out of equities and into bonds,” says Clark. A yield curve inversion occurs when long-term interest rates drop below short term rates. The inversion of 2 and 10-year Treasury yields is at its steepest since the 1980s.

Clues may lie in Japan’s poorly performing bond market. “Not only has it been prescient in leading the U.S. bond yields lower from 1999 onward, in 2020 the JGB market was also prescient in signaling the future U.S. treasury sell off,” he says.

Russell Clark

And what Japan is likely seeing that U.S. investors aren’t right now is China-driven food inflation. That’s something the Fed will find it tough to ignore, he said.

Since the since the 1980s, food commodity prices have followed raw commodity prices higher, If the Fed wants to work that down, it will raise interest rates. For example, falling natural-gas prices
NG00,
-3.37%
would help ease fertilizer costs for farmers.

Clark points out that China is the world’s biggest food importer, with much higher prices than the U.S.

“Pork, which is the most consumed meat in China, is now 3 times more expensive than the U.S. market, and has recently doubled in price. As Japan is also a large importer of pork, perhaps this was the reason the JGB market sold off before the U.S.,” he said.

Beef is also a major import for China, and yes, prices are much higher than that of the U.S.

“In essence, I am saying that China is exporting food inflation to the rest of the world, and I don’t see that ending at the moment. JGBs seem to agree – and when I look at the index value of US Food CPI on a log basis, I keep thinking that is says interest rates are going higher not lower,” said Clark.

He sees food inflation looking secular, rather than cyclical, due to the demands of an increasingly urbanized China. “Secular food inflation implies POLITICAL pressure to have higher interest rates. US treasuries look a short to me, just as everyone has gotten long,” he said.

The markets

Stock futures
ES00,
-0.73%

YM00,
-0.54%

NQ00,
-0.72%
are falling, and Treasury yields
TMUBMUSD10Y,
3.684%

TMUBMUSD02Y,
4.467%
and oil
CL.1,
-3.12%
also are falling. The Japanese yen
USDJPY,
-0.61%
is seeing some safe-haven bids. The Hong Kong Hang Seng Index
HSI,
-1.57%
closed down 1.5%.

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.

The buzz

An apartment-building fire in a locked-down city that killed 10 appeared to spark protests across China, calling for the President Xi Jinping to step down and zero-COVID policies to stop. A BBC reporter was arrested and beaten. Meanwhile, lockdowns mean China farmers are destroying crops they can’t sell.

And similar unrest at China’s Zhengzhou Foxconn
2317,
-0.50%
factory is expected to cause a shortfall of 6 million Apple
AAPL,
-1.96%
iPhone Pros this year.

Pinduoduo shares
PDD,
-1.44%
are soaring after the China-based mobile marketplace reported profit and revenue beats.

MGM Resorts
MGM,
-0.42%,
Las Vegas Sands
LVS,
+0.26%
and Wynn Resorts
WYNN,
-0.57%
higher in premarket after Macao tentatively renewed their casino licenses.

Retailers are in focus after Black Friday online sales topped a record $9 billion. That’s as some wonder if Cyber Monday is still a thing.

St. Louis Fed President James Bullard will sit down for an interview with MarketWatch on Monday, at 12 noon Eastern. New York Fed President John Williams address the Economic Club of New York at the same time. Fed’s Powell will speak on Wednesday, along with several other Fed officials this week.

A busy data week starts Tuesday with home-price indexes and consumer confidence data. GDP, the PCE price index for October — a favored gauge of the Federal Reserve and November employment data are also on tap this week.

Best of the web

‘I believe the economy is the biggest bubble in world history,’ warns ‘Rich Dad, Poor Dad’s Robert Kiyosaki.

Iran was calling for the U.S. to be expelled from the Qatar World Cup.

Lab study shows next COVID strain will be more deadly.

The tickers

These were the top-searched tickers on MarketWatch as of 6 a.m. Eastern:

Ticker	Security name
TSLA, -0.19%	Tesla
GME, -1.99%	GameStop
AMC, -1.70%	AMC Entertainment
AAPL, -1.96%	Apple
COSM, +34.06%	Cosmos Holdings
AMZN, -0.76%	Amazon.com
BBBY, -2.70%	Bed Bath & Beyond
MULN, -2.39%	Mullen Automotive
APE, +0.83%	AMC Entertainment Holdings preferred shares
DWAC, +6.44%	Digital World Acquisition Corp.

Random reads

Chinese woman on a mission to visit everyone else’s lonely elderly relatives.

‘Gaslighting’ is Merriam Webster’s word of the year. No, really.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

Listen to the Best New Ideas in Money podcast with MarketWatch reporter Charles Passy and economist Stephanie Kelton

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November 28, 2022