Make money regardless which way the bond market goes

In December last year, close to $2 trillion was wiped out within a month time. Who could afford this kind of gigantic loss? Of course no one, not even people as rich as Bill Gates or Buffett! It was a loss occurred in the bond market due to violent short-term interest rate hike in the past couple of months. If you don’t know, the bond market is the biggest market, much bigger than the stock market. Therefore the money flow is huge more than you can imagine!

The bond market has enjoyed nearly 4 decades of bull run non-stop, which has brought down the long term interest rate to below 2% that has never been so low in history. But I think the epic bull run for bonds has come to its end. We are probably witnessing a historical moment for the turning point of the long term trend for bonds, that is a decades’ long bearish trend for bonds may has started in front of our eyes. Of course, only history can tell if I’m right. Apparently there is still a lot of uncertainty which way bonds will go, especially in the short term. With huge trading flows moving the bond market up and down, the risk is obviously high if you bet on the wrong direction. This prompts me to explore ways to try to make money regardless which way the bond market will go. I think I have found one. 

First think about for a moment, regardless you bet for up or down for bonds, what service you must use for making such trades? Yes, you definitely need a trading platform to execute your trading orders no matter how you bet for it. Nowadays, virtually all the trading platforms are electronic. MarketAxess (MKTX), is just such an electronic trading platform for investors worldwide to trade corporate bonds and other fixed-income instruments. As a middle man to bring both sides of traders together, MKTX is a very cost effective business that can make money whether the traders make or lose money, as long as they have to trade. What a genius idea to set up such a business model!! At a price tag close to $200 per share, MKTX is by no means cheap with a PE near 60. For most stocks, this is kind nose-bleeding expensive valuation but you have to understand it is not an average stock earning a low profit margin like 5-10%. Its profit margin is nearly 40%! That’s why it is a money gushing machine without costing too much to maintain, a capital efficient business. That’s probably also the reason why it does not need to borrow money to run its business. It holds tons of cash on its book with zero debt. It is also a very stable stock comparing with other stocks in the market with a beta as low as 0.54. In other words, MKTX is almost 50% less volatile than S&P 500. Holding MKTX is virtually like investing in bonds without holding bonds.

Pay attention to MarketAxess!