The Bond Market Blues
“Bottoms in the investment world don’t end with four-year lows; they end with 10 or 15-year lows.”
- Jim Rogers
Bottom Line — The Bull market for bonds won’t happen again for another 25 years.
When you take a step back and look at the current bond market conditions, you see the age-old strategy of placing cash in bonds and a low-cost index fund, as a "saving grace" to portfolios, is coming to an end. The market is in perfect position to catch investors off-guard, and it is at these junctures when markets can do the most damage.
Recently, U.S. Treasury Yields hit historic lows, sending investors scrambling to take advantage of bargain buying opportunities with little hope beyond capitulation. However, capitulation hasn't occurred and yields remain at their all-time lows.
In other words, it's left investors taking shots, hoping to catch the market rebound; where in reality the V-shaped, U-shaped recovery, or any other preferred analysis metric, won't be realized for quite some time. With the 10-year Treasury note yield at less than 1%, investors run the risk of losing current and potential wealth - since the yield is running less than inflation.
Earlier in the week, Fed Chairman Powell held a press conference discussing the current economic outlook and the Fed's take on negative interest rates, where he stated, “The committee’s view on negative rates really has not changed," despite the political pressure and the market already pricing-in the possibility for negative rates next year. However, if we've learned anything over the past couple years, we know that Powell does a great job at doing what he's told.
So, what does the economic outlook and Powell's seeming inability to make decisions on his own mean for investors? That there is a high chance of seeing negative rates by early next year; thus fueling the new era of a bear market on bonds.
This could prove to be a serious problem for investors looking to maintain a fixed income investment that carries a low-risk, but steady return - especially with such anticipated uncertainty for the not-so-distant future of the bond market.
An important note to remember when investing in Treasuries—is that even though the Fed has control over short-term interest rates; it has long-been argued, and several studies have shown, that Federal Banks have limited control over longer-term bonds.
The current bond market conditions are eerily similar to another period in time…
When looking at what transpired in 10-year Treasury yields, leading up to the 1987 stock market crash, you can easily identify the correlation to what is currently happening in today's markets.
For those needing a nostalgic reminder, in October 1987, deemed as Black Monday, the stock market was subject to one of the worst days in market history - where the Dow saw a drop of -22.6%. To this day, it still holds the rank of being the largest daily percentage loss.
The next largest daily percentage loss occurred most recently, on March 16, 2020, where the Dow dropped a total of -12.93%.
Why is this important for Investors?
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The Bear market for bonds is upon us, and it's not going away anytime soon.
But bond investments, in general, impede an investor's ability to reach their investment goals in a timely manner, and result in significant portfolio inefficiencies.
These strategies simply destroy portfolios over time, through constant under-performance and exposure to unknown threats. So, why waste valuable time and wealth in an under-performing market that is only going to get worse?
At the end of the day, when it comes to investing and increasing one's wealth, you must at least be in a position to beat interest rates and inflation. If you can't do that, then maybe it's time to re-think the investment strategy.
Sometimes, as an investor it can be hard to realize your portfolio's greatest risks until it's too late. During periods of high uncertainty and market calamity, time is not on your side, accelerating losses and stealing away hard-fought earnings. It's better to take the necessary steps now, to protect your wealth from market misery... than later.
