Bond market = "smart" market

I keep hearing the various pundits say that the bond market is the “smart” market, as opposed to the stock market (being a more “dumb” market).

For example for the past few months the bond market was going up but at the same time the stock market was also going up. The pundits were saying “don’t listen to the stock market, better listen to the bond market which is the smart market, and so the bond market is right.”

I am wondering why that is? Why is the bond market considered smarter than the stock market?

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Because there’s a heavy dose of retail investors playing in the stock market. Retail investors are dumb. Retail investors are too dumb to even figure out how to purchase individual bonds. That leaves only institutional investors (smart money) playing in the bond market. It’s pretty much that simple.

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Who told you that? Must be bond managers.

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I hear this from various people. Not only bond managers. Even hedge fund managers who trade both bonds and stocks tend to take more seriously the bond market’s messages.

One is that bond math is more complex. Second is that they are much more focused on downside risk, so they tend to have more bounded optimism. And third the bond market is huge

Fourth is because it’s where black swan works.

I’m sure that there is a much lower percentage of individual investors (i.e., idiots) in bond markets than in equity markets.

What say you about retail forex traders?

Sorry, but what do you mean “it’s where black swan works?”

I know what black swans are, but I don’t understand how this relates to the bond market being smart.

Around here, Black Swan’s not so much a what as he is a _ who _.

One aspect of bond markets is performance is very tightly linked to rates and FX (which circles back to rates). As a result, I think bond markets can be more macro focused than equities where things are I think more idiosyncratic. You can sort of think of it as bond markets being more top down and stocks more bottoms up in analysis. Also as has been mentioned, bond markets have less upside exposure (particularly these days) so they can be more tuned in to macro moves to the downside.

That said, bond markets have a large insurance money component, much of which is yield focused and slow to sell (or completely against selling in the case of life insurance). There’s also a fair argument to be made about the overall quality of the analysts in that sector although I believe it has been improving a bit. I feel like insurers are sort of like the retail investors of bond markets, in large part due to the restrictions income mandates place on their ability to sell and the way it can push them into crowded trades.

All told though, I know my friends in even relatively sophisticated equity HF’s often tend to ping me for input on macro developments and I tend to reach out to them when I’m unsure on more company specific questions, I think they just tend to have a more intricate individual investment focus vs bond markets looking more to the horizon. If you listen to a DoubleLine Total Return quarterly call, the first 50 minutes is macro talk that has nothing to do with anything specific followed by about 15 minutes of fund performance, so that gives you an idea of where the focus is whereas macro focused equity funds are increasingly rare.

they say credit anticipates, and equity confirms

let’s be honest, more work is put into debt offerings than equity offerings. you can sell a piece of crap to equity investors but you probably at least need some interest coverage if you’re going to sell a bond. if there is not interest coverage and/or if it is some sort of convertible bond, then it’s not a “true” bond and is more for equity investors anyway. if bonds are moving, it is because tangible things are happening. equities can move either on nothing.

i think there are just more dumbasses in equity than bond. but bond imo is easier to study than equity.

theres just less guess work with bonds. its pure math. the coupons are fixed. interest rates and inflation may change, which will affect its mkt value. now if the company blows up due to shit performance or some scandal, then you gotta see which assets they have that are backing it, the sneiority of your bond, etc etc. its more like looking at the fine print of your bond.

if the company goes up, you still get the same rate. you are juss measuring blow up risk and if the blow up will affect you. a company can go broke. but if ur bond is secured by a specific asset in their bs then you are gucci. of course this comes at the expense of everyone below you including equities.

for equities the coupons can change. they can go higher or lower. which could hedge out inflation/interest. but you are dead ass if the company busts down like thottiana. if the company financials go up though, you get the excess.

^ That doesn’t really apply if you’re running a total return fund particularly when dealing with spread compression and shifts in the curve. That’s more of a book yield focused mindset. It would be like saying you bought a stock with a 5% dividend and so you knew your return would be 5%, it’s completely ignoring one of the larger drivers of return (capital appreciation).

not disagreeing with you. well thats why the really smart ones focused on distressed debt. anyways at these low rates, you aint getting appreciation, more like a discount to par. rates will not go negative for long. at some point, everyone will buy a reallly big bed to stuff it in.

besides i dont think dividend means shit. its really earnings that matter. the dividend just means that the company reduced its responsibility to compound.

Well I guess my point is that you’re assuming you hold to maturity (which is usually the case in an income oriented book yield type fund). But for total return funds your holding periods are like maybe a year or so, sometimes much less sometimes much more. So you can buy a 30 year BB bond, they get bought or good earnings or some other corporate event and you can see a 10-20% gain then sell, it’s not unheard of. Back in like January 2016 some analysts were buying two year FCX bonds at >20% yields that later sold <4% yields within the year on price appreciation. The gains were pretty equity like. Around the same time, Glencore I think 5 years were yielding 10-15% that within the same year ratcheted in through price appreciation to <4% and I think Teck long bonds dipped into the $30 range before bouncing back to about $80. Obviously these were pretty wild events but a total return investor wasn’t thinking either in terms of certain returns or holding to maturity. Even today if you have the stomach for it there’s some pretty strong yielding CCC/B bonds, so its definitely relative, although you are correct that by and large at today’s valuations people aren’t thinking about price appreciation that haven’t lost their minds in BB and investment grade areas.

i think that the junk market is a big problem. yields are trading near all time lows, and that the juice is not worth the squeeze. also lots of investment grade cos have also been issuing a ton of debt to buy back stock. so the minute their earnings falter, they can get rated down to junk. a rise in rates will annihilate them. so we should all wish for perma low rates. or at least a very slow rise.

Maybe maybe not. The leverage in BBB is confined to really three counter cyclical sectors with strong cash flow. You also have to realize these guys all termed out their maturity profile so most of them have like 3-5 years before serious refi’s begin and even then it’s in stages as stuff roles off. It’s not like rates go up and they instantly have to cover.

HY is probably a little more due for a shakeout.

yea i always like how they stagerred the bonds. much smarter. but i have seen balloons that are ridiculous. morningstar used to show a a timelines with maturiting dates in the x axis and interest rates in the y axis. they then had different size of circles representing the amount of bonds. it was always nice to get that visual. i wonder why they discontinued.