Excellent post as always, Thanks. As fed steps in normalizing its policy with inflation coming and pressures from pretty much everywhere mounting, do you have a ballpark figure for 10yr at year end or maybe next year?
thanks jaypay. point estimates always difficult, but i see 5y5y real yields at -60bps and i think something closer to 0 is more appropriate and likely still very conservative. a 10yr regression of 5y5y real vs. 10yr yields would suggest 10y closer to 1.8-2%...i think this is a reasonable target for 1Q22.
the implication for equities is more about the speed of adjustment rather than the level. eventually equities will adjust to whatever 10yr yield level we have...but if we get to 2% quickly, it will sting first.
Agree. Feels like its reasonable for many to be less confident on sustainability of current deeply -ve real yields with inflation getting anchored upwardly. With bond bears still timid on rates, I have 1.75% for year end but will see how fast fed is willing to change stance to be humble on their inflation outlooks. Appreciate your reply and posts. Thank you so much.
The Z23 contract has a 4y return approximating zero, and (ignoring covid) there is no discernable long term trend. Why is that? It was overpriced 4y ago?
Early 2020 saw a -43% drawdown (holy margin call, Batman). Are you being adequately compensated for that risk?
thanks for the feedback and question. first, i hate that substack doesn't allow for charts in posts. a couple of points in response:
1) i don't think any market is adequately priced for a COVID like market risk. SPX fell 34% at that time but that was with forward p/e of 19x vs. 21.5x today. or BBB yield 2.5% today vs 2.7% then.
2) energy and financials are important dividend payers and the last 4yrs for both groups have been difficult. energy for deleveraging and financials due to threat of regulatory dividend cuts. don't see either as a medium term threat where balance sheet of both sectors are in far better shape today.
3) i would use ASD3 Index as a better proxy which is the rolling 3yr contract. 4yrs ago, the Z24 was the 8yr future...doesn't trade much. will see more of a trend here
4) rather than Mar'20 as the risk scenario, i'd consider 4Q18 (i.e. growth scare) as a better proxy. ASD3 Index fell 5% vs. SPX down 20%.
5) finally, i didn't mention in the note but historically dividend growth lags earnings growth by one year, which bodes well for 2022.
Thanks. I do see a continuous contract looks much better, which is not what I expected for a market in contango. Obviously I do not have a deep understanding of this contract.
It is a really interesting idea - so thanks for that - but sadly I do not appear to have access at IBRK where I trade futs.
I found DIVD which is "S&P 500 Annual Dividend Index" but isn't tradeable. Amazingly, even knowing the answer I can't find that without the exact ticker (SPXDIVAN or SDAZ1). Oh, for some consistency in tickers ...
Great minds think alike - i love the the dividend futures idea and have a position. In a true inflationary scenario the out years are quite cheap. Further, the threat of a stock buyback tax from DC could shift some shareholder payouts into dividends.
Excellent post as always, Thanks. As fed steps in normalizing its policy with inflation coming and pressures from pretty much everywhere mounting, do you have a ballpark figure for 10yr at year end or maybe next year?
thanks jaypay. point estimates always difficult, but i see 5y5y real yields at -60bps and i think something closer to 0 is more appropriate and likely still very conservative. a 10yr regression of 5y5y real vs. 10yr yields would suggest 10y closer to 1.8-2%...i think this is a reasonable target for 1Q22.
the implication for equities is more about the speed of adjustment rather than the level. eventually equities will adjust to whatever 10yr yield level we have...but if we get to 2% quickly, it will sting first.
Agree. Feels like its reasonable for many to be less confident on sustainability of current deeply -ve real yields with inflation getting anchored upwardly. With bond bears still timid on rates, I have 1.75% for year end but will see how fast fed is willing to change stance to be humble on their inflation outlooks. Appreciate your reply and posts. Thank you so much.
The Z23 contract has a 4y return approximating zero, and (ignoring covid) there is no discernable long term trend. Why is that? It was overpriced 4y ago?
Early 2020 saw a -43% drawdown (holy margin call, Batman). Are you being adequately compensated for that risk?
thanks for the feedback and question. first, i hate that substack doesn't allow for charts in posts. a couple of points in response:
1) i don't think any market is adequately priced for a COVID like market risk. SPX fell 34% at that time but that was with forward p/e of 19x vs. 21.5x today. or BBB yield 2.5% today vs 2.7% then.
2) energy and financials are important dividend payers and the last 4yrs for both groups have been difficult. energy for deleveraging and financials due to threat of regulatory dividend cuts. don't see either as a medium term threat where balance sheet of both sectors are in far better shape today.
3) i would use ASD3 Index as a better proxy which is the rolling 3yr contract. 4yrs ago, the Z24 was the 8yr future...doesn't trade much. will see more of a trend here
4) rather than Mar'20 as the risk scenario, i'd consider 4Q18 (i.e. growth scare) as a better proxy. ASD3 Index fell 5% vs. SPX down 20%.
5) finally, i didn't mention in the note but historically dividend growth lags earnings growth by one year, which bodes well for 2022.
Thanks. I do see a continuous contract looks much better, which is not what I expected for a market in contango. Obviously I do not have a deep understanding of this contract.
It is a really interesting idea - so thanks for that - but sadly I do not appear to have access at IBRK where I trade futs.
if you search under SPXDIVAN in IBKR you should find the futures contracts
Awesome, thanks!
I found DIVD which is "S&P 500 Annual Dividend Index" but isn't tradeable. Amazingly, even knowing the answer I can't find that without the exact ticker (SPXDIVAN or SDAZ1). Oh, for some consistency in tickers ...
Great minds think alike - i love the the dividend futures idea and have a position. In a true inflationary scenario the out years are quite cheap. Further, the threat of a stock buyback tax from DC could shift some shareholder payouts into dividends.