Bonds are the adult in the room. And when they speak, we should probably hear them out. This week bonds went on a tear. What were bonds trying to say? They were listening to the ‘Fed Speak’ in the U.S. that left many confused. Of course, the Federal Reserve and the Federal Reserve Chairman set the overnight rates that affect bond markets and our borrowing costs. It’s an economic lever. Maybe the adults in the room are suggesting that inflation is not a threat? We’ll see deflation in the near future? Or maybe a recession is closer than we think?
Here’s a good barometer for the bond market and economic sentiment – long term U.S. treasuries.
They’ve had a good month (and more) and they had an explosive week. The index ETF was up about 3% over the last two days. Long term treasuries are known as some of the best stock market risk managers. They punch above their weight.
Must read: Bonds are the adult in the room.
Recently I suggested that the stock and bond markets are buying the transitory inflation argument.
And in my most recent MoneySense weekly I had a look at some of the economic data for Canada and the U.S., including that recent Fed Speak and reaction.
Perhaps the bond market is going well beyond saying ‘inflation is transitory’. Let’s have a listen to what a few experts say about this weeks stock and bond activity.
David Rosenberg says look out below.
In a recent Globe and Mail piece Mr. Rosenberg suggested that inflation jitters will turn into deflation fear by year end. (pay wall) Of course bonds like deflation. And that’s one reason why we hold bonds right? Even though almost no one thinks that we could enter a long period of economic contraction and deflation. From Mr. Rosenberg …
“When these temporary disturbances fall out of the data, people are going to be surprised at how low the readings are going to be on these official inflation statistics,” the famed Canadian economist said in an interview Friday.
“I think we’re going to go back to talking about disinflation and deflation [by] the end of the year.”
The boring balanced portfolio is having its way these days. Stocks for growth and bonds for ballast and no-growth scenarios. Readers will know that I am also a fan of covering off inflation as well, you’ll read about that in the new balanced portfolio.
Investing is like a box of chocolates.
To quote Forrest Gump, you just never know what you’re going to get. This past week gave us that big and important reminder. Who would have thought that bond investors would have a such a sweet week? I’m happy to hold long term treasuries and that TLT and the BMO Canadian dollar version in ZTL.
Mike Philbrick at ReSolve Asset Management offered via Twitter …
No one knows the future price of any asset class so diversification is incredibly important as the first line of defense.
And as an example, pick your poison of inflation or deflation or economic shocks of any variety. More from Mike …
Another great example, why making sure investors are always exposed to inflation shocks rather than trying to time it … Money and mindshare piled in recently but all the returns came months before that, when investors were not noticing.
Perhaps there is no real economic growth?
Perhaps the bond markets echo Lance Roberts (no relation), CIO and partner at RIA Advisors, with respect to what is real and sustainable economic growth?
The reason that rates are discounting the current “economic growth” story is that artificial stimulus does not create sustainable organic economic activity.
And on the inflation front from Lance, you can’t create real inflation from artificial growth. From that post …
Yes, we see that word “deflation” again.
Rethinking the 60/40 portfolio?
That has been a hot topic for quite some time given the low yield environment. Many suggest tweaking up your equity exposure to the 70% level or so, if you have the risk tolerance. That was certainly covered in this post on the Horizons one ticket ETFs. Those portfolios employ U.S. Treasuries that help dampen the volatility of increasing equity exposure.
Recently I joined the Horizons podcast to chat with Mark Noble, Executive Vice-President of ETF strategy. The topic was evolution of the balanced ETF portfolio. I had a blast, thanks to Horizons for having me on.
This week reminded us that stock and bond markets are more than unpredictable. And markets can react aggressively to the short term news and events. For those who need to manage the risks and volatility, I’d suggest that bonds can certainly still play a role. You might consider that bond barbell approach.
And with rates so low, certainly we might adjust our expectations for returns for the balanced portfolio.
And to be a broken record, you might also (and still) protect or hedge against inflation. Maybe the bond markets have it wrong this week. We don’t know for sure what that box of chocolates might offer up. We can hedge with REITs, gold and other commodities and real assets.
Once again, you might just bolt on some of that Purpose Real Asset ETF PRA. You could add it to your existing ETF portfolio or one ticket asset allocation portfolio.
Don’t forget to check out that MoneySense weekly. I take a look at this …
And I think you’ll enjoy my take on the grand economic reopening, and that virus as the wild card.
The virus pivots.
That said, the virus is not taking all of this human optimism lying down. It’s learned to pivot by creating “variants of concern.” The variants are known to be more transmissible compared to the original version of the virus.
So, the pandemic has not yet been cancelled, as evidenced by some Royal Caribbean ships that won’t sail. Royal Caribbean cruise lines have pushed back cruise dates after eight crew members tested positive for COVID.
We have no playbook for how to reopen. When it comes to pandemics, this is our first rodeo.
Thanks for reading. We’ll see you in the comment section. What were the bond markets saying this week? What say you?
And maybe the bond markets are speaking out of turn, or perhaps offering some gibberish given all the market manipulation. As Greg Foss offered in an email exchange.
… I don’t believe you can get ANY honest readings from the bond “market”, when there is an elephant squashing free market expression …
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Dale
I note the ETF bond chart you show looks great over the last two weeks.
The reality is YTD it is down over 8% and in the last 365 it is down over 10%. (Not including yield, so the returns might be slightly better)
That still isn’t enough to convince me to hold a bond. I would like to get a positive return after inflation.
Plus I still contend, if you must hold bonds, hold individual bonds and go short. That way you know going in what your return will be, worst case.
But go ahead, convince me I’m wrong. I will keep reading.
Hi Rick, it’s a personal choice to manage risks, or not. I just put ideas and learnings on the table 🙂
Dale
Hi Dale,
I know so little that it sometimes feels like I’m walking through the jungle, at night, no flashlight, & a blindfold on!
What does the David Rosenberg comment “Keep an eye on 1.92% on the long bond yield. That’s the 200-day moving average and we are closing in on that level. We break that and it’s a case of look-out-below!”?
Does closing in on the 200 day moving average mean bonds are going up?
If it breaks that level, does that mean they are going further up?
And if that’s the case, why would we look out below?
Confused!
Please educate me & thank you.
Hi Paul, Mr. R. is suggesting that rates would go lower. That would increase the value/price of the bonds.
It looks like the 30-year U.S. treasury is 2.1% this morning.
Hope that helps. Feel free to fire away again.
Dale