During their latest episode of the VALUE: After Hours Podcast, Porter, Vinny, Taylor, and Carlisle discuss Just Buy The 2-Year At 5%. Here’s an excerpt from the episode:
Porter: You run these structural deficits for so long, how long can you do it for? Right now, you’re seeing a crowding out. Heck, I want to buy the two-year at 5% too. I don’t know. We’re worried about chop fest. The queues are down 115 bips today. Why not just own the two-year? I think you’re seeing more and more and more of that, of people saying, “Screw this volatility. I’m just going to own the two-year.”
Vincent: The two-year– [crosstalk]
Tobias: Yeah, vol [crosstalk] since that’s been possible. Sorry.
Vincent: Oh, yeah. The two-year and shorter duration is the best risk-adjusted asset on the board. That doesn’t sell well in asset management community, [Jake laughs] because it’s just not– And I’m telling you, it sells even worse in bank land because the value add of a bank has always been the low-cost deposits and now, they’re competing against an alternative investment vehicle that has equally compelling default risk characteristics.
But yeah. Maybe it’s because we’re market participants and we’re looking at daily marks, but this stuff just takes time. I’ll admit it’s probably taken a little bit longer than I thought it would just in terms of the slowdown. There are, as we were saying, offsets. But if you believe the way we do is that we’re overly indebted and highly financialized, eventually these higher rates are going to take its toll. They have already, but I mean it really take its toll.
Porter: Everybody just gave their thesis on our bank short. We don’t have a lot of them. We have a handful of bank shorts on the portfolio. Their percentage of, they call them DDAs, which is checking account deposits where you’re earning zero is the highest it’s been really ever. If you r evert to any sort of mean, and you go from zero to the go-to deposit rate or the two-year rate, which is 5%, it’s a big difference, and that really crimps your margin. Especially, if you’re an inverted yield curve, it’s just not a great place for the banks.
Porter: Asset quality is not getting any better and growth stinks. So, I don’t understand, besides being maybe optically cheap, what’s the bull case for the banking system right now? There’s just not a good one.
Jake: Yeah, they went long cheap and they’re borrowing short now, expensive.
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