Author Topic: Deflation hedges  (Read 137667 times)

petec

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Re: Deflation hedges
« Reply #410 on: March 12, 2020, 04:06:50 PM »
Side question :

How much of the $40B portfolio can they realistically deploy if they see good names ?
With indiscriminate selling I would think they wouldnít have to ďtry to hardĒ to find investing opportunities like in the past.

I understand their need to buyback some of the minority positions, recap the insurance side to take advantage of the hard market and maybe buy back shares with left overs take priority; but all these are being funded through corporate earning. Correct ?

They cannot redeploy a meaningful amount into equities.

They canít recap the subs in any meaningful way and if the equities remain depressed may not be able to grow into a hard market.

They certainly donít have the capacity to grow and buy back stock.

The only opportunity is in the bond portfolio - but that could be huge.
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TwoCitiesCapital

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Re: Deflation hedges
« Reply #411 on: March 12, 2020, 06:43:49 PM »
Side question :

How much of the $40B portfolio can they realistically deploy if they see good names ?
With indiscriminate selling I would think they wouldnít have to ďtry to hardĒ to find investing opportunities like in the past.

I understand their need to buyback some of the minority positions, recap the insurance side to take advantage of the hard market and maybe buy back shares with left overs take priority; but all these are being funded through corporate earning. Correct ?

They cannot redeploy a meaningful amount into equities.

They canít recap the subs in any meaningful way and if the equities remain depressed may not be able to grow into a hard market.

They certainly donít have the capacity to grow and buy back stock.

The only opportunity is in the bond portfolio - but that could be huge.

Yea - if credit spreads explode, they don't necessarily need rates to rise to make decent on the bond portfolio. We're already past the peaks of 2016 and 2018 for the widening of credit spreads.

Fingers crossed for 8-10% on high yield and 4-5% on IG corporate. Fairfax is tempting at these prices, but without a meaningful chance to make money on rates we need a larger dislocation to make it up on credit.

petec

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Re: Deflation hedges
« Reply #412 on: March 12, 2020, 06:46:47 PM »
Fingers crossed for 8-10% on high yield and 4-5% on IG corporate. Fairfax is tempting at these prices, but without a meaningful chance to make money on rates we need a larger dislocation to make it up on credit.

That would meaningfully improve the outlook for FFH.
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petec

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Re: Deflation hedges
« Reply #413 on: March 12, 2020, 06:59:55 PM »
TCC which spreads are you seeing being higher than 2016? Iím not seeing that for most of the obvious candidates.
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TwoCitiesCapital

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Re: Deflation hedges
« Reply #414 on: March 12, 2020, 07:48:24 PM »
TCC which spreads are you seeing being higher than 2016? Iím not seeing that for most of the obvious candidates.

Just the average spreads on the indices as reported by Bloomberg/Barclays. OAS for HY is over 6.5% at this point. For IG it's over 2%.

Both are elevated relative to the highs for both 2015/2016 and in 2018 - of course neither of those last two was an official recession. In 2019, HY spreads were as high ~15% so we could have a ways to go, but I think this will likely be more mild.

I'm probably a buyer of high yield bonds in excess of 8% spreads and I imagine Fairfax could put some money to work opportunistically in HY, IG, and preferreds @ that time too

« Last Edit: March 12, 2020, 07:55:25 PM by TwoCitiesCapital »

Xerxes

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Re: Deflation hedges
« Reply #415 on: March 12, 2020, 08:00:58 PM »
Just to understand what is being explained :

Is the opportunity for FFH to liquidate itís current bond portfolio with a capital gain as yield crater or is the opportunity for them locking at higher rate on corporate bonds due to widening spread ?

Or both

StubbleJumper

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Re: Deflation hedges
« Reply #416 on: March 12, 2020, 08:03:20 PM »
Just to understand what is being explained :

Is the opportunity for FFH to liquidate itís current bond portfolio with a capital gain as yield crater or is the opportunity for them locking at higher rate on corporate bonds due to widening spread ?

Or both


The latter.  The time to reach for yield is when you are paid for the risk.  There's starting to be a bit more reward for risk in the market.

TwoCitiesCapital

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Re: Deflation hedges
« Reply #417 on: March 12, 2020, 08:51:15 PM »
Just to understand what is being explained :

Is the opportunity for FFH to liquidate itís current bond portfolio with a capital gain as yield crater or is the opportunity for them locking at higher rate on corporate bonds due to widening spread ?

Or both


The latter.  The time to reach for yield is when you are paid for the risk.  There's starting to be a bit more reward for risk in the market.

Yea, I'd say both if they hadn't dumped all of their duration back in 2016, but short-term bonds aren't going to go up much - even if the Fed cuts rates to zero. Best case scenario is you get a few percentage points as a one time gain and that's it because yields are back to 0%.

The higher credit spreads allow them to sustainably lock in higher yields for the long-term even if interest rates aren't cooperating - this was not an avenue that was available to them a month ago. 

StubbleJumper

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Re: Deflation hedges
« Reply #418 on: March 12, 2020, 08:54:55 PM »
Just to understand what is being explained :

Is the opportunity for FFH to liquidate itís current bond portfolio with a capital gain as yield crater or is the opportunity for them locking at higher rate on corporate bonds due to widening spread ?

Or both


The latter.  The time to reach for yield is when you are paid for the risk.  There's starting to be a bit more reward for risk in the market.

Yea, I'd say both if they hadn't dumped all of their duration back in 2016, but short-term bonds aren't going to go up much - even if the Fed cuts rates to zero. Best case scenario is you get a few percentage points as a one time gain and that's it because yields are back to 0%.

The higher credit spreads allow them to sustainably lock in higher yields for the long-term even if interest rates aren't cooperating - this was not an avenue that was available to them a month ago.


A month ago?  Just last Saturday when I was commenting on the AR I trotted out some silliness about "IMO, this is not the time to reach for yield..."  Here I am five days later noting that maybe it's time to start looking for opportunities to reach for yield!  It has been a hell of a wild week....


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petec

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Re: Deflation hedges
« Reply #419 on: March 13, 2020, 02:26:53 AM »
Just to understand what is being explained :

Is the opportunity for FFH to liquidate itís current bond portfolio with a capital gain as yield crater or is the opportunity for them locking at higher rate on corporate bonds due to widening spread ?

Or both


The latter.  The time to reach for yield is when you are paid for the risk.  There's starting to be a bit more reward for risk in the market.

Exactly - with the possibility that if spreads compress again when coronavirus turns out not to have killed everyone and when central banks really turn on the taps, they get a nice boost to BV. So it could be both, but one after the other.
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