Are T-Bills Better Than Bonds Right Now?

During their recent episode, Taylor, Carlisle, and Meb Faber discussed Are T-Bills Better Than Bonds Right Now? Here’s an excerpt from the episode:

[Meb] I have a lot of non-consensus views, a lot of consensus views. I think everyone knows, everyone feels at their core that US stocks are expensive. Who cares?

Right. I can pick when the party is going to end. But you go on TV, you talk to people like everyone kind of knows it.

Right. Like it’s not like a secret. Fixed income is different.

And we wrote a paper on this a few years ago. And I feel very much an outsider and alone in the wilderness here. I take some comfort that Buffett’s stacking T-bills, my local Angelino gunlock, I feel like is talking about this.

But from a fixed income outsider, you know, we looked around a few years ago and you’re looking at this inverted deal curve and looking at this very strange period. And we asked a very simple question, which was like, there’s all these risky bonds. Can we simulate what would it look like if you just invested in them when the spread to T-bills, the risk-free rate was wide or compensating you for the extra risk or if it was narrow or inverted?

And to me, this comes very much from a place of value stocks, right? Like are you buying something with no margin of safety or a tonne of margin of safety? And we did this with no look forward bias.

So we were doing a point in time study and we looked at all the various bond markets and across all of them, it turned out it was a horrible idea to buy them when you weren’t getting any yield or below average. And it was a great idea to buy them when you were. And so then we said, well, you can put together a portfolio.

[Jake] And what was the threshold that you triggered it? Yeah.

[Meb] And so the way we did it, I think, and so we wrote a paper called T-bills and chill most of the time. And I think the way we did it, I can’t remember, it was, it simply sat in T-bills because everyone forgets the thing that trend followers, that, you know, people, the time markets, they always forget is that if you exit a position, often people assume that the return you’re going to get is zero while you’re waiting. But that’s not true.

You can sit in T-bills and earn three, four, five percent, whatever it is. And so we ran the study and it was simply, hey, up to that point in time, did the 10 year, the 30 year corporate junk, emerging tips, REITs, we even included stuff all, did it have an above average spread or below? Because if it was below, you just sit in T-bills.

And what did it look like when you were below? If you invested when you’re below, like you underperform T-bills, it’s terrible. So we launched a fund called TYLD.

And all it does is it sits there in T-bills and it looks at 10 different sleeves of the risky bond market and it’ll move into those sleeves if and when the spread is compensating you. And so that fund launched like, I don’t know, two years ago or something. It has been a hundred percent in T-bills the entire time.

It is a hundred percent in T-bills today. Now people, like you’ll see people call on CNBC and be like, wow, corporate bonds are some of the lowest spreads ever. Junk bonds, some of the lowest spreads ever on and on, like, like one percentile, right?

Not like bottom third. The thing that is causing this is that for a number of years, you had these institutions that got no yield. So you’re a pension plan.

You want to, you know, neutralise these liabilities. Hey, I got to hit my six, seven percent target and, you know, bonds, corporate T-bills, whatever, yield zero or one percent, like you’re hosed, right? And all of a sudden they’re like, wow, these yield five now?

Hallelujah. They don’t care that they have a competing asset that you can take no risk. And so if we know anything about bonds, particularly corporate and junk, when the VIX goes up to 40 or 60 or 80 in the next crisis, those spreads blow out, right?

Like they go not from five to six, they go from like five to 10. And so this is kind of like almost like a distressed Howard Marks idea. Like it’ll systematically move into these if and when that happens.