Ep 01: Why "Risk-Free" Isn't Free: Bond Yields, Inflation, and Hard Assets

And the topic for today is interest rates and discount rates and how that impacts equity valuations.

And it's been a really interesting time in the bond markets, especially over the last few months.

So the Treasury yields are continually climbing despite the recent rise in interest rates.

And I think the 10-year US Treasury is over 5.3% and the 30-year is approaching highs as well.

What do you make of the climbing treasury yields? What do you think the bond market is saying?

Yeah, it's really interesting.

I think we're at 25-year highs for both the 10-year and the 30-year at this point, which is pretty mind-boggling.

What the market is saying is, you can speculate a lot of things.

I think one thing that's clear is the market's not confident necessarily that inflation will be coming down anytime soon.

And there could be a lot of different things that's driving that sentiment.

But if the market was confident that inflation would be curbed, then these 5.3% bond yields would be quite attractive.

And you probably wouldn't see a rising bond yield occur in practice.

However, that's what we've been seeing over the past few months at this point.

So happy to talk more about the inflation idea.

I don't know if you have any other thoughts as to what would be causing this increase.

I agree with you.

Because the purchasing power of the dollar is going to be less in the future, bond investors are requiring more yield to compensate them for that risk, which totally makes sense.

I do think about it too, from a supply and demand point of view, demand drops and the supply increases, the price of the treasuries will drop too.

So I think it's a sign that holders of treasuries are in aggregate selling them, which is then driving prices down, driving yields up.

Now, obviously, we're not macro investors, we're individual company, fundamental bottoms up investors.

Do you think about this at all in terms of how it drives your portfolio or equity allocation?

It is a great question.

To your point, we're not macro investors, but we do operate in a market that is largely comprised of macro investors.

So that probably does have some sort of impact on maybe the positions we end up choosing, whether it be a direct impact, meaning something that we're focused on specifically with what the bond yield is today, or if it ends up being more indirect.

I would say most of my investing decisions up to this point and probably into the future have been more a product of indirect effects from macro events like bond yields or inflation generally.