The Bonds Are Talking

Bond investors don’t get a lot of media attention, despite controlling 10x as much money as public stock investors.

The lack of coverage makes sense from a media perspective. Bond investors focus on numbers and risk, not stories, which frankly isn’t very fun.

Stocks are more about stories and stories are fun.

But when bonds talk, we should listen.

The Story Bonds Are Telling

Bond investors generally have little upside outside of collecting the coupon payment they’re owed or taking some gains if interest rates fall. But they have downside risk if a company they back defaults or goes bankrupt.

Interest rates have been the story for most of the last two years. You can see below that the value of iShares’ 20+ year and 7-10 year treasury bonds has dropped despite the stock market rising. These will be a proxy for corporate bonds and you can see that values are dropping like a rock.

Market conditions have even gotten worse in the last 6 months. But the S&P 500 doesn’t seem to have noticed.

The charts I’ve shown are government bonds, so they aren’t factoring in default risk. But they’re a proxy for the rate corporations will pay on debt and higher “risk-free” rates mean investors have an appealing option to riskier stocks or bonds.

At the same time, corporate defaults and bankruptcies are on the rise.

Small businesses are feeling the pinch as well.

Listening to The Market

What the bond market is telling us is that it’s seeing more risk than it did two or three years ago. As a result, high-risk, money-losing companies are going to have a hard time raising capital. And we see this in practice.

• Rivian announced a $1.5 billion debt capital raise only to see its stock fall 23% the next day.

  • We have not yet heard that this debt was ever sold.

• Chargepoint’s stock is down 22% in just two days since announcing a $232 million capital raise.

• Loom just sold itself to Atlassian for a 36% discount to its 2021 valuation.

Bond markets are getting cold.

Private funding markets are all but frozen.

Equity markets haven’t seemed to notice yet.

What I’m Doing

I’m a high-risk investor, but I’m not crazy. 11 of 13 of the Asymmetric Portfolio stocks are free cash flow positive and recent spotlights and portfolio allocations have leaned toward companies who are on rock solid financial footing.

I think the trend over the next 5-10 years will be strong businesses getting stronger and the weak getting weaker as easy money is turned off.

That’s what the bond markets are telling us and I, for one, am going to listen.

Disclaimer: Asymmetric Investing provides analysis and research but DOES NOT provide individual financial advice. Travis Hoium may have a position in some of the stocks mentioned. All content is for informational purposes only. Asymmetric Investing is not a registered investment, legal, or tax advisor or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please, do your own research before acquiring stocks.