Thanks. Helpful overview for sure. My conclusion, for whatever it’s worth, is that it’s still too early for me to allocate anything to bonds.
So my question is, how correlated are the REITs to something like the five-year notes or the 10 year bonds?
Since I’m 65, and for the first time in my life, have begun a very slow DCA process into a couple of higher quality Reits that have excellent balance sheets and are not exposed to the Office sector. REITS are obviously down significantly and some of these high qualitys are now yielding more than any of the Treasuries.
Reading your post is giving me pause for thought about possibly pausing my process.
The REITs you’re invested in are they ETFs or closed ended funds? Also if you don’t mind me asking what part of the article gave you pause about the REITs? I also did a quick correlation analysis between XLRE and the 10 treasury bond future and they are fairly correlated (between 0.65 and 0.5 the majority of the time)
So far small positions in the Schwab ETF, and MAA, O, EQR, and AVB.
They’re obviously getting hammered this week and as a value investor Im wanting to build a long-term position in these. I am tempted to allocate more capital while they are getting cheaper. But would rather not buy too much more until I see better signs that they’re bottoming.
MAA has been correlated heavily with the 10Y bond future contract this past year especially since July, with highest correlation being 0.88 to the lowest level of 0.38ish. I’m far from an expert in REITs but from a TA perspective
I don’t think REITs have bottomed yet. But as you mentioned you can slowly add to your position.
It’s been a little surprising to see how much greater the percentage drop of MAA has been than something like TLT the last couple days.
I know it may be strange to use the term embedded duration for an asset class like REIT, but MAA is trading worse than ultra long bonds.
Unless in the specific case, there’s some capitulation going on because earnings, only mildly exceeded expectations instead of the street game of needing to greatly exceeds expectations to not get punished
Thank you for taking the time to answer my complex question. It's always good to read different thoughts; otherwise, there's a risk of waking up in an echo chamber where you only hear what you want to hear. I read your articles, but I have to admit that I don't understand everything. That's not because of you, but more due to the fact that my knowledge of macroeconomics is limited. The reason for my question is simple: I'm holding a larger short position on the DAX. :-)) Best regards, Daniel
ok, no worries and always happy to help. Ok, let's talk this through. What's the basis or the thesis behind your trade? Also happy if you want to conversate via email on paperalfalink@gmail.com
Now, the big question arises, and I'd greatly appreciate a straightforward answer that's easy to grasp. Has the recession already been factored into the market, or are we still in the midst of a significant downturn in the indices? If possible, could you also explain the reasons behind it, as if I were still a puppy..-)) As I sense that the FTSE and DAX are following the lead of their larger counterparts, the question of differences between the US and Europe may be redundant
Apologies for the late reply. I was pondering your question. Firstly, your question implies quite a few assumptions in market workings. You want a straight forward answer to a highly complex question which entails many different cross currents. If you read any of my pieces you'd know that I follow a process of multi-dimensional analysis. Has the recession been factored into markets? I would say no, as the prevailing market narrative is clearly focussed on a soft landing. That's true for the US, Europe and the UK. Bond markets give us a clue as we can look at pricing. Currently, over the next year US and EUR bond markets anticipate roughly 100 bps in easing, while the UK stands at 70 bps of easing. This is, in my view, consistent with a slowing inflation picture rather than growth.
Not sure what you are referring to when you are saying downturn in indices? What indices are you referring to? DAX is closing in on ATH while the FTSE is a bit off that mark. If you are referring to the vulnerability of those indices to a recessionary pricing, my answer would be yes, of course there is vulnerability in isolation, which in itself, however, is not a sufficient condition (recession) for indices to retreat. There is more to it, especially if we have an improving liquidity picture and the ability of central banks to ease as inflation allows them to provide stimulus. What's the trade? Short EU/UK equities , Long US Equities? That might be an obvious choice. The valuation gap, however, is possibly already pricing for such outcomes. CAPE ratio for the US is roughly 30, while it's 20 for Europe and about 15 for the UK. I hope this helps.
Sufficient condition but not necessary. I see gold as a forward price on liquidity conditions rather than bond prices. If bonds rally it could mean easier liquidity conditions further out. If bonds rally due to stresses gold would sell off.
Thanks. Helpful overview for sure. My conclusion, for whatever it’s worth, is that it’s still too early for me to allocate anything to bonds.
So my question is, how correlated are the REITs to something like the five-year notes or the 10 year bonds?
Since I’m 65, and for the first time in my life, have begun a very slow DCA process into a couple of higher quality Reits that have excellent balance sheets and are not exposed to the Office sector. REITS are obviously down significantly and some of these high qualitys are now yielding more than any of the Treasuries.
Reading your post is giving me pause for thought about possibly pausing my process.
Any thoughts or suggestions would be appreciated.
Let me have a think
The REITs you’re invested in are they ETFs or closed ended funds? Also if you don’t mind me asking what part of the article gave you pause about the REITs? I also did a quick correlation analysis between XLRE and the 10 treasury bond future and they are fairly correlated (between 0.65 and 0.5 the majority of the time)
So far small positions in the Schwab ETF, and MAA, O, EQR, and AVB.
They’re obviously getting hammered this week and as a value investor Im wanting to build a long-term position in these. I am tempted to allocate more capital while they are getting cheaper. But would rather not buy too much more until I see better signs that they’re bottoming.
MAA has been correlated heavily with the 10Y bond future contract this past year especially since July, with highest correlation being 0.88 to the lowest level of 0.38ish. I’m far from an expert in REITs but from a TA perspective
I don’t think REITs have bottomed yet. But as you mentioned you can slowly add to your position.
Thanks for your thoughtful response. Agreed.
It’s been a little surprising to see how much greater the percentage drop of MAA has been than something like TLT the last couple days.
I know it may be strange to use the term embedded duration for an asset class like REIT, but MAA is trading worse than ultra long bonds.
Unless in the specific case, there’s some capitulation going on because earnings, only mildly exceeded expectations instead of the street game of needing to greatly exceeds expectations to not get punished
Thank you for taking the time to answer my complex question. It's always good to read different thoughts; otherwise, there's a risk of waking up in an echo chamber where you only hear what you want to hear. I read your articles, but I have to admit that I don't understand everything. That's not because of you, but more due to the fact that my knowledge of macroeconomics is limited. The reason for my question is simple: I'm holding a larger short position on the DAX. :-)) Best regards, Daniel
ok, no worries and always happy to help. Ok, let's talk this through. What's the basis or the thesis behind your trade? Also happy if you want to conversate via email on paperalfalink@gmail.com
Now, the big question arises, and I'd greatly appreciate a straightforward answer that's easy to grasp. Has the recession already been factored into the market, or are we still in the midst of a significant downturn in the indices? If possible, could you also explain the reasons behind it, as if I were still a puppy..-)) As I sense that the FTSE and DAX are following the lead of their larger counterparts, the question of differences between the US and Europe may be redundant
Apologies for the late reply. I was pondering your question. Firstly, your question implies quite a few assumptions in market workings. You want a straight forward answer to a highly complex question which entails many different cross currents. If you read any of my pieces you'd know that I follow a process of multi-dimensional analysis. Has the recession been factored into markets? I would say no, as the prevailing market narrative is clearly focussed on a soft landing. That's true for the US, Europe and the UK. Bond markets give us a clue as we can look at pricing. Currently, over the next year US and EUR bond markets anticipate roughly 100 bps in easing, while the UK stands at 70 bps of easing. This is, in my view, consistent with a slowing inflation picture rather than growth.
Not sure what you are referring to when you are saying downturn in indices? What indices are you referring to? DAX is closing in on ATH while the FTSE is a bit off that mark. If you are referring to the vulnerability of those indices to a recessionary pricing, my answer would be yes, of course there is vulnerability in isolation, which in itself, however, is not a sufficient condition (recession) for indices to retreat. There is more to it, especially if we have an improving liquidity picture and the ability of central banks to ease as inflation allows them to provide stimulus. What's the trade? Short EU/UK equities , Long US Equities? That might be an obvious choice. The valuation gap, however, is possibly already pricing for such outcomes. CAPE ratio for the US is roughly 30, while it's 20 for Europe and about 15 for the UK. I hope this helps.
If the bond price stabilizes or even rises, I anticipate significant support for gold.
Sufficient condition but not necessary. I see gold as a forward price on liquidity conditions rather than bond prices. If bonds rally it could mean easier liquidity conditions further out. If bonds rally due to stresses gold would sell off.