Bond Returns Have Been Spectacular. Don’t Count on a Sequel.

johnN

https://www.nytimes.com/2019/07/12/business/spectacular-performance-bonds.html

Bond Returns Have Been Spectacular. Don’t Count on a Sequel.
CreditLynn Scurfield
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CreditCreditLynn Scurfield

By Carla Fried

July 12, 2019

Bond interest rates were supposed to rise in 2019. They have dropped instead, showing how dangerous it can be to make investing decisions based on assumptions about the direction of interest rates.

Old_Skeet

Nice article. Skeet

hank

The other link to this story seems to have been deleted now. Myself, Ol Skeet, msf (and perhaps others) had commented on it. As I mentioned on that thread, interest rates have pretty much been trending downward since the early 80s when Fed chair Paul Volker jacked up short term rates to stop runaway inflation. The 10 year treasury topped out north of 15% around than. As we know, declining rates increase the value of longer dated bonds, while rising rates work against bond values. So we’ve had nearly 40 years of favorable rate trends for bond investors (more than half the lifetimes of many of us).

Paul Volker didn’t do this alone. There was the financial crisis and global market meltdown of ‘07-‘09 which compelled central banks to push rates lower by assorted means. Inflation has been subdued thanks to retail giants like Amazon, less powerful labor unions and relatively cheap energy - due to fracking and other advances. Low inflation generally translates into lower interest rates (and improving bond values). Additionally, upward pressure on rates from the baby boomers buying first homes in the 70s and 80s has abated - helping drive rates lower as well. All good if you invest in longer dated high grade bonds.

The lower-quality bond market (ie: junk) has been helped by a record 10+ year U.S. economic expansion and bull stock market which finds itself 3 or 4 times higher than it was only a decade ago. Since lower rated bonds react (favorably or unfavorably) to overall economic conditions (and secondly to long term rates) junk and corporates have tended to follow the stock market higher.

The article is correct that the past 6 months have been “spectacular” for just about any type of bond / bond fund. Missing in the headline, but critical to the article, is that many prognosticators predicted rising interest rates for this year - while in fact rates have trended lower with the 10 year getting below 1.95% recently before closing above 2% at week’s end. I have no major criticisms of the article. However, unless you butter your bread on both sides by trading in and out of bonds - particularly the lower rated ones (as @Junkster does very well) - you probably shouldn’t be too focused on your 6 month bond return. Anything other than cash and ultra-short IMHO is best suited for terms longer than a year or two.

I’m glad Ol Skeet liked the article and kicked it over to the discussions + part of the board.

Tarwheel

To me, the key takeaway is the futility of predicting interest rates. Last fall, it was considered gospel truth that the Fed would continue hiking interest rates through 2019 with some so-called gurus predicting rates as high as 5-6%. That scenario quickly unraveled over the winter.

Now the “experts” are predicting big cuts in interest rates. I’m not convinced, as that scenario could dissolve if inflation indicators start rising. Tariffs, low unemployment rates, and barriers to immigration could all contribute to inflation.