Mechelany Advisors' BOND PORTFOLIO Mechelany Advisors’ BOND PORTFOLIO was structured in 2020 for clients wanting to benefit from a EURO-based high yielding portfolio using a leverage of one to one and generating 14 % income per annum.
Since the beginning of 2021, strong economic data, a powerful rally in commodities and the deployment of vaccines around the world has changed the sentiment considerably in global and US bond markets.
US treasury yields have trebled on the US 10-year tenor and more than doubled on 30-year bonds.
At the same time, the yield curve has steepened considerably, anticipating both a return of economic growth and a return of inflation.
Bond investors have become wary of inflation and in fact the bond market is more short than ever in the past 10-years as large bond holders have been hedging their portfolios and speculating on a continuation of the rise in bond yields towards 3 % on the 30 Year Bonds.
Investment grade bonds have followed suit and rose from 2% to 2,54 %, as spread have tightened again.
The real area of danger is in High Yield bonds where investors are not throwing the gauntlet, too happy to earn marginally higher yields at 4.45 %.
HOWEVER the Spread between risky bond and non-risky bonds has fallen to historical extreme, another sign of the full risk-on mentality of investors.
Interestingly enough, despite their regular reassurances, the FED is not able to counter the rise in bond yields and this creates a dangerous situation as equity investors have not yet taken the full measure of the damage caused by rising bond yields on extreme valuations.
Indeed, since February , a major breakdown took place in technology stocks and the switch from Growth to value stocks is the fastest on record.
As investors are massively short bonds, we are taking advantage of the weakness to increase our exposure to Treasury bonds and we are nearing a short term tipping point.
Mechelany Advisors’ BOND PORTFOLIO
We have navigated successfully the extreme volatility of 2020 and our BOND PORTFOLIO is up 34 % almost 1 year after we have created it.
We had been taking our profits regularly while maintaining an acceptable level of income flows. In the past two months, we have started accumulating Treasury bonds while keeping on taking profits on riskier credits
TODAY, WE ARE INCREASING AGAIN OUR EXPOSURE TO US TREASURY BONDS AND HAVE DOUBLED OUR POSITIONS IN THE 10, 20, AND 30 YEARS TENURES.
Our total exposure to US Treasuries is now 115 % of our portfolio, while emerging markets are down to 20 % and EUR denominated bonds 15 %.
As it stands, our BOND PORTFOLIO yields 6.35 % gross and 5.55 % net while being very tilted towards Governments and 30 Year bonds.
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