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Matthew Tuttle and Rob Isbitts discuss what’s happened in the bond market and why it now has everybody’s attention (1:45) rate watching, inverted curves and the absolute level of the 10-year (5:25) and what they’re each buying (18:00).
Transcript
Rob Isbitts: Welcome to Seeking Alpha’s Wall Street Breakfast Sunday Edition. I’m Rob Isbitts, Seeking Alpha contributor under the profile Sungarden Investment Publishing and creator of a brand new site on the Substack platform, ETF Yourself.com. My friend Matthew Tuttle of Tuttle Capital Management is with me again. He’s a fellow Seeking Alpha contributor, a highly experienced trader and an ETF innovator. So, we hope you can learn from our experience by listening to this podcast and following us on Seeking Alpha.
Now, Matthew, this has been a week that’s followed other weeks of pretty massive activity and crosswinds in the markets, yet the trends in stocks and bonds, just like in 2022, have been down. So, what do you think, first of all, are the biggest news items of the week? Keeping in mind that we’re taping this on Thursday and that Friday is the Jobs report, so we won’t catch that in this, but, of course, by the time people listening to this on the weekend, they’ll know what happened there.
Matthew Tuttle: Yeah. So, the biggest news of the week was interest rates. Second biggest news of the week, I would say, it was probably interest rates. And if I had to pick a third, I’d say interest rates.
RI: Yes. Yep, I get you there. And we were talking together on this air not too long ago, and I remember that the battleground for interest rates was 4.3% on the 10-year Treasury. And I don’t remember my exact comments, but basically kind of thought all heck would break loose if we burst above that. And poof, here we are, many basis points above that. And really, I think what has happened in the bond market now has everybody’s attention.
It’s pretty funny. I know you’re not the biggest fan of, oh, let’s say the leading television network for the financial business, marketing business. But I will say that I do — I listen a lot, I’ve listened a lot for decades, if for no other reason than, I want to know what people are saying. And there are actually some pretty interesting things that I’ve heard, believe it or not, by watching television.
And one of them had to do with a headline, and I wrote about this in Seeking Alpha probably a couple of times in the last two months, but then I saw it sort of flash on the screen this morning, “Do all investors need to be bond investors or bond watchers now?” And I think we’ve been saying that for several months here, but really, I mean, probably for a couple of years independently, the bond market matters to the stock market.
In fact, at this point, it’s effectively dragging the stock market around. And the two are linked together like they were in 2022, and in a way that they probably haven’t been since the 1970s.
MT: So for most people watching the market, their experience is interest rates at basically zero. And so, there would be zero reason for them to watch the bond market, or care about the bond market in any way, shape, or form. For those of us who have been around a little bit longer like you and me, we remember periods where interest rates were much, much, much higher.
We remember periods where they were much higher than they are now. But I think it’s easier for guys like us to pivot to realizing, which I think we both did, we got to be watching the bond market right now.
And when I wake up in the morning and start looking through my charts, the first chart I’ve got to be looking at is where are our interest rates. And that’s what I tell people every day in my newsletter – just watch rates, and watch rates intraday, and rates are going to bring you to everything.
And you’ve really seen these market movements that are really one trade, which is higher rates, higher dollar, lower precious metals, higher oil. And again, like I said, I look at that as one trade. It’s a higher rates trade.
RI: Right. And let’s clarify for everybody listening. When we’re talking about the bond market and rates, for the better part of this year, maybe the first half of the year, you had a focus on lower rates, I should say on shorter-term rates, okay?
For the better part of, I’m going to say, six, seven, maybe eight months of 2023, the focus was on T-bill rates, and then 2-year bonds, out to 3-year bonds, and they’re all getting close to or above 5% yield. And this is something that we haven’t really seen in almost a generation of investing.
If you were — in 2008, if you were working really hard and you weren’t really paying that much attention to your portfolio, you looked at your 401(k) every three months or something like that when you got your statement, you didn’t know from this, you didn’t know from your T-bills at 5% giving you time to wait it out. But more recently, the attention now has been on the longer-term bonds catching up.
I have quite a bit recently on Seeking Alpha and at ETF Yourself that the 10-2 Treasury spread is something that every investor should really get familiar with. This is basically the difference between the yield on the 10-year U.S. Treasury bond and the yield on the 2-year Treasury note.
The reason is normally you want to wrap your money up with the government or any corporation for 10 years versus 2 years. Well, 10 years is a longer period of time. Work can go wrong. You demand a higher payout for that. And so — but we haven’t had that situation in a while. It’s been reversed. The curve has been inverted so that a 2-year yield is more than a 10.
When that flips around, and, boy, is it doing it at breakneck speed. I mean, it wasn’t that long ago where the 2-year was yielding little more than 1% more than a 10-year. That’s almost — I mean, very historically rare. The only time it seems to happen and then reversed itself and sure enough as we sit here I mean it’s narrowed by probably two-thirds in just a matter of weeks. When the curve inverts, okay, 2-year higher than 10-year. And then un-inverts, the un-inversion, times up very well with recessions. Comments on that?
MT: So, yeah, I agree to an extent. When the curve was inverted, you heard a bunch of people talking about, oh, that means a recession, that means a recession. I’m dubious of that. I just think it means the curve is inverted. I’m more focused, especially now, on the absolute rate of the 10-year, because so much is based on the 10-year.
I mean, obviously, mortgages, and you’re starting to see articles in the paper about 8% mortgages. What’s that going to do to the housing market when all of a sudden you go from a 2% mortgage to an 8% mortgage? That’s going to have ramifications. Businesses that rely on borrowed money, commercial real estate, regional banks competing for deposits, and all the other stuff that’s going on.
So, I just think right now the absolute level of the 10-year is what I’m really focused on, because I think it’s causing havoc out there.
I think some of the violent moves you saw, like I don’t know if you were watching utilities, but utilities were down, (XLU) was down over 5% the other day. On a day, the S&P was basically flat. Now, that was misleading because the Magnificent 7 were cranking, but still, if I tell you, “Hey, XLU is going to be down 5.3% and the S&P is going to be flat,” you’ll be like, “Well, no, that’s not going to happen.”
It almost seems like at some point this week, somebody got carried out on a stretcher. Somebody was way too levered going into FOMC, got a tap on the shoulder, and had to sell, sell, sell. And that’s some of the dislocations that you saw. I look at how the regional banks are trading right now. And I think that the absolute level of the 10-year, and it’s not as much where it is, it’s how fast it got there. I think either it’s going to break something or it’s already broken something and we just haven’t heard what that is.
RI: Yeah, maybe breaking it in slow motion or breaking things in slow motion. So, in a minute, we’re going to get to some other markets and then kind of talk about how we’ve been putting that in motion.
The other thing that I think folks should keep in mind, okay, because you see the 10-year rate going up. Well, there’s a lot of reason that it is going up. But one of the main reasons is that, for years, there have been probably five or six different sources of buyers of those bonds. The Treasury would issue them. Now, U.S. government debt is over $30 trillion and rapidly increasing. And so, they have to keep issuing more debt.
For what it’s worth, this will be a bigger problem probably next year and the year after, but the vast majority of that debt, or, I should say, a very big chunk of it at least, is maturing in the next few years. So, at some point, what may break is that the Fed has to lower interest rates simply so the government can borrow at more reasonable rates for longer periods of time because corporations can run at a loss only so long. And they’ll have that issue next year when a lot of junk corporations have to refinance their debt.
Well, the U.S. can keep printing money, but at some point, there’s a bit of a buyers’ strike. Strike is a big deal between UAW and all the other ones we’re hearing about now. But the other strike, I think, is a bond buyers’ strike. Why? Because China, and especially Japan, who are big holders of U.S. government debt, have bigger issues in their own countries. And that’s why, like you said before, rates go higher because they’re demanding more for the bonds, but at the same time, they’re providing the selling pressure.
And the Fed, who was the buyer of last resort and then became basically the main buyer for years when things were really getting silly out there before 2022, they’re not really in buy mode now either. So, what happens in any business when you have a buyer strike? Well, you have to raise your price. And the price for the U.S. government is the 10-year yield. Unfortunately, that causes a ton of problems on Main Street, which I think you absolutely correctly pointed out.
MT: Well, and I think there’s more to it than that though. So, last week’s FOMC meeting I think Powell really kneecapped the bulls. I think people came into that meeting thinking a couple of things. Number one, the Fed was done raising rates, and number two, they would start aggressively cutting next year. And what Powell said is, “Well, no, we’re not done. Decent chance we got one more this year. Oh, and by the way, the projections for cuts for next year are not nearly as many cuts as we previously set.” And I think that is extremely problematic.
I think one of the reasons that stocks had rallied, along with the whole AI bubble stuff, was that people were assuming the Fed was done and, next year, we’re going back to business as usual. And Powell said, not so fast. And I think we’re seeing a lot of those expectations also flowing through into the bond market.
RI: Yeah. And lest anybody think that we’re some kind of permabears here, all we’re really trying to do is assess all sides, right? And I think we agree on this and if we don’t, that’s fine, because that’s what makes the market.
I write in three places primarily. I contribute to Seeking Alpha, of course, under Sungarden Investment Publishing. I started ETFYourself.com recently, and I’m going to quote a commentary from there in a minute; and also etf.com.
I had a commentary on ETFYourself.com recently, the title was “Good Luck Hunting”. I don’t know much, but I do know this is really, really, really hard right now to hunt for things that you can take a intermediate to long-term position, not a trading position, in on the long side of the equity market.
And we’ll get to our picks and what we’re doing in a second. But I mean, I look across and I say, wow, bonds, no thank you, unless it’s short-term T-bills or maybe a couple of years out in treasuries.
Forget credit risk. Forget most of the stock market. Yeah, I’d love to see it bottom. And I’m sure dollar cost averagers can put new money to work anytime. But wow, I mean, like I say, good luck hunting, because it just isn’t a lot out there.
There’s a lot of risk and the reward comes with a lot of risk. And personally, that is not an environment where I want to do anything other than get that short-term interest from the T-bills and such, and try to attack, exploit profit from investing in markets that are falling, which is into reverse ETFs, put options, things like that. What do you think? And tell me what you’re doing?
MT: So, when you say intermediate to longer-term, I would agree with you. Short-term, I’m actually, and again, we’re coming into a jobs number tomorrow, but I’m actually bullish. And I’m only bullish from the standpoint of the S&P 500 is nearing two levels: one, the 200-day moving average; the other one, 4,200.
And I vividly remember before the market broke out in June after Nvidia’s (NVDA) earnings, how hard it was to break through that 4,200 level. It just couldn’t do it. And then, it finally did and it was off to the races. I don’t think the way support and resistance works if you’re trying and trying and trying to break through something, that becomes very significant support. I think that area will be defended, and I think if we get near there, we’re going to bounce.
I also look at, and again, I could be completely wrong and we’ll know it on tape, you look at the positioning going into that jobs number tomorrow and everyone is positioned short.
And I know one thing the market loves to do is screw up the most people possible. So, I would not be surprised in any way, shape or form if we see a bounce. Now, do we see an intermediate-term bounce? That would shock the heck out of me. Do we see a short-term tradeable bounce or a bounce that you would then rejigger shorts into? That would not surprise me one bit.
What I have been doing is, I’ve been shorting regional banks, my favorite. I’ve been shorting REITs, my second favorite. Started shorting energy. And one name that sticks out to me is Abercrombie & Fitch (ANF), so been shorting that.
On the long side, I mean, like you said, not much. I mean, I got back into some uranium names on the pullback. I missed the initial surge. So, I grabbed (CCJ) on the pullback. And one name that really — yeah, I’m looking at the gold miners. I’m nibbling on those again.
And one name that really interests me is (GEO). It’s a prisons and things of that nature, just based on what’s going on crime-wise and what’s going on immigration-wise. They make a lot of things that play into those themes. So that’s what I’ve been doing.
RI: Great. Yeah, I think that you just explained in shorter term, trader terms, one of my golden rules of investing. My belief is that any investment can go up in price at any time. And that’s the part that I believe is always less certain. I think what I do in my own work, and as a technician for so long and as a market watcher for so long is, anything can go up, but how much risk of major loss is attached? And I see a lot of things where there’s major loss attached when you get beyond the exact type of bounce that you talked about, which could come from any piece of economic data or any piece of news.
So, to finish up, I’m with you on the energy bear. Actually, in one of my trading accounts, I own symbol (ERY). I don’t do a whole lot of levered or two times, but there isn’t much in energy for single inverse. So, ERY is a double short energy. I’ve been writing (TBF) and (TLT) put options for a couple of months now. And that’s been a year-maker, I’m happy to say, I mean, relative to everything else. I mean, let’s remember the environment we’re in, okay? The average stock in the S&P 500 as we’re recording this is down 2% this year. So, bull market, what bull market?
And just looking through some other things, I mean, natural gas, looks like it could break out. I don’t think you mentioned that, but I’m with you on the banks and the REITs. And like I said, I’m just jonesing to try to buy something in the equity market that I feel like I can actually hold for more than a couple of weeks, because I’m swing traded all the way out to long-term investing.
I’d like to buy something and hold it for more than a year. But the only thing I’ve been able to do in that realm and hold it for, let’s say, a year or more, are Treasury bills. And my guess is it’s the same with you, at least for the moment, but we continue, I wouldn’t say hopeful, but we continue to watch all angles.
MT: And, yeah, it’s the same. I mean, that’s been the only thing I’ve been long-term holding is Treasury bills. I did just today dip my toe into Eli Lilly (LLY). I mean, I think a lot about the whole obesity epidemic, but I don’t think it’s going anywhere. And I think people are going to try to eat junk food and take fat loss drugs. So, I’d love to hold on to that for a while. But again, I’m a chart guy. I mean, if it violates levels, it’ll violate levels. But I’ve been watching it. And it finally came down into support. So, I said, “All right, let’s buy it here.”
RI: Well, thank you, Matthew Tuttle. I will summarize it by saying this, I’m 6 foot 4 inches tall, but when it comes to my personal portfolio positioning right now, I am very, very short.
So, let’s finish up here. Thanks for listening to Wall Street Breakfast Sunday Edition. Nothing on this podcast should be taken as investment advice of any sort. At times, myself, Rob Isbitts, and my co-pilot Matthew Tuttle or any guests may own positions in securities mentioned.
You can follow me on Seeking Alpha under the profile name Sungarden Investment Publishing and at ETFYourself.com. Matthew Tuttle’s Seeking Alpha profile name is Tuttle Capital Management. And he’s also got a great new publication out called The Woke Street Journal, which is definitely worth a read.
We also invite you to join the thousands of people who follow the Wall Street Breakfast podcast on Seeking Alpha, where you’ll find full transcripts for all episodes. To take advantage of Seeking Alpha, become a premium subscriber. Learn more at seekingalpha.com/subscriptions.
Talk to you next time.
