US 30-Year Yield Raises Alarm in Longest Run Above 5% Since 2007

[00:00:00]Well, today, um, you just think of the starting yield and the starting yield today on the Bloomberg U.S. aggregates 4.91%.

[00:00:08]That's the highest of the past year because yields have been rising lately, the starting yield. So I think the 2031, I could probably tell you in 2031, um, uh, God willing that, uh, the yield, the return that you had on bonds was, uh, in the U.S. aggregate, uh, was 4.91%, 94% correlation since 1978. Uh, so the starting yield is really important. It's the main determinant of your future returns. And so that's that's the thing I would focus on most is just simply getting that return.

[00:00:38]The rise in yields lately has is another bite provides another bite at the apple.

[00:00:43]Yields have been rising on and off for about four years fluctuating.

[00:00:47]Some investors are still stuck in cash, still stuck in low yielding money market instruments in the mid 30s or so, when you could get yields between 5 and 7% in portfolios, having an average credit quality in the key of double A minus, which is to say 89.98% chance of getting your money back.

[00:01:05]According to historical statistics. So the starting year is really important story right now. Look at first job I think for this guy Tom trading assistant. Guess where Prudential based 115 Broadway right next to Trinity Church. It's a wonderful place to be.

[00:01:22]Right near Wall Street. Yeah.

[00:01:23]A room of stockbrokers, which today they call financial advisors.

[00:01:28]And I learned a lot from them, about 30 of them.

[00:01:30]And still today, these days worldwide, I visit many financial advisors again that they once called stockbrokers working for commissions.

[00:01:38]Today it's a lot different. It's actually a good thing for investors. I make in a fixed income world today.

[00:01:43]Tony, can I just clip coupons? That's that's a nice way to make a living. Yeah.

[00:01:47]And here's here's another statistic. And looking at this yield where it is to the yields where they are today. And using the Bloomberg aggregate again as a gauge. And it's can be mirrored worldwide in a one year period going back to 1978. Uh, investors one year later have made money 96% of the time. In other words, the return a year for now probably will be positive. So even if yields rise further from here and they've been rising lately, that means bond prices could fall.

[00:02:14]The coupon the income is published in the coupon of the 30 year old.

[00:02:19]In France, the gilt in the UK, even in the United States, gives pause.

[00:02:24]There's some superlatives like price back to where it was 2007, whatever.

[00:02:29]As you look at the global system which you can do is Pimco bring that over to U.S. investors?

[00:02:35]Is it idiosyncratic or are they attached?

[00:02:39]It's really a synchronic. And that's why at Pimco, we've been suggesting a sourcing duration globally because the US story isn't great necessarily. On the fiscal side, we know the U.S.

[00:02:50]has a big budget deficit. It must continuously issue bonds.

[00:02:54]And that could that could result in yields rising.

[00:02:57]So we decide lately to source our duration globally, including in the UK, for example, where yields are above that of the US, Australia, for various reasons related to the macroeconomic situation in the emerging markets, where this year has been very fine performance, better than in the US, and it seems like the asset class is tending to to fare better in the eyes of investors. So we think there are many idiosyncratic stories worth diversifying portfolio into.

[00:03:27]Michael writes in and says he thinks the Fed's going to raise next week.

[00:03:32]What do you think? Uh, we do not think so.

[00:03:34]Uh, of course, Warsh isn't in the business of signaling things, but I think we think he would, uh, perhaps if, uh, if it were, uh, imminent.

[00:03:43]Uh, we're in the camp of the fed doing nothing this year.

[00:03:46]But even if it hikes rates. And when talking about this glorious bond market story. Bond investing story.

[00:03:52]So what? Uh, and I think of, uh, Alan Greenspan, who I met years ago, uh, very fortunate when he was an advisor to Pimco.

[00:03:59]And I worked in Newport Beach. Uh, he raised rates aggressively in 1994, battling the inflation fears of the late 70s, early 80s or late 80s.

[00:04:09]And he won, as in his last two half point hikes at the end of February of 1994 and early 95, yields fell. So don't worry about hikes as a bond investor because it actually it's it's uh it's medicine and it's tough love and it's a good thing. Uh tell me here generalist portfolio manager. Somebody with a real job at the Pacific Investment Management Company like Jerome Schneider is missing the short term money market. How is this year going?

[00:04:38]And I mean, Paul's talking about there's this big the aggregate is the wall of money moving out of money market into the Jerome Schneider space.

[00:04:47]It is let's say we should he should run from cash to core.

[00:04:50]But of course cash has its place. But another statistic would show that on a three year rolling basis, that that core investments, meaning an average maturity of around five six years of the Bloomberg aggregate around six years, uh, three year rolling basis, meaning three years for now, I should be able to tell you with 85% confidence that, uh, core beat cash.

[00:05:09]So tends to beat cash, especially with yields and cash high threes The this guy could get around five and and high quality fixed income investments 5 to 7%. So you're probably better off shifting a bit from cash to course. So I'd say random walk to that idea.

[00:05:25]Because here's one other point. And many Americans have, of course, locked in on a low mortgage rate. Um, Americans should start thinking about joining what I call the double Lock club.

[00:05:35]You locked in the low mortgage rate on your debt.

[00:05:37]Why not lock in a high interest rate on your on your, uh, fixed income investments? How much credit risk should investors should be taking? I mean, year to date, the high yield index and the Bloomberg terminal performing the best.

[00:05:49]It's winning. But, uh, um, this yields are good enough, as I mentioned, -5 to 7%. So what we need and stretch out into and go down in the capital. So what do you think of your new book coming out? I I'm, I'm contemplating a seventh.

[00:06:03]Um, uh, a few different ideas. One is a novel, uh, called The Wall Street Tale, which will both go back to my days.

[00:06:10]I worked, uh, you mentioned financial. Basically.

[00:06:11]After that, I worked at Lehman Brothers in the World Trade Center, 104th floor.

[00:06:14]Some good stories. Wow.

[00:06:16]I have an amazing view I had up there.