Bonds Remind Investors How Unsafe They Are - InvestingChannel

Bonds Remind Investors How Unsafe They Are

Proprietary Data Insights

Financial Pros Top Bond ETF Searches in January

#120+ Year Treasuries36
#27-10 Year Treasuries22
#3Short-duration High Yield Corp.18
#4General High Yield Corp.13
#5AAA Rated Corp12

Pay Attention to The World

As we point out in our main story, easy money policies from global central banks pushed international government debt to such high prices that even the paltry interest rates in the US looked attractive.

Why buy negative yields in German or Japanese bonds when US treasuries at least pay you something.

But inflation isn’t limited to the US. It’s become a global problem.

The difference is the US Fed is taking a more aggressive approach to fighting inflation by raising interest rates than other countries.

Without global central banks raising interest rates, the decline in US treasuries will be limited.

That’s why we want to keep an eye on other central banks including the E.U. and U.K.

Japan is unlikely to change its rate policy since it isn’t experiencing any inflation.

But once we start seeing rates increase in the E.U., that will suck money into those debt markets by offering better returns.

And that could send US treasury prices down even further.

So don’t just worry about the US Fed. Watch international central banks as well.


Bonds Remind Investors How Unsafe They Are

Key Data

  • Typically, bonds and stocks trade in opposite directions. That relationship has broken down.
  • Bonds also carry significant risk since prices hit historic levels during the Covid crisis.
  • Cash or short-duration bonds, as well as commodity ETFs are better bets for short-term safety during selloffs.

Financial advisors used to believe in a balanced portfolio between bonds and stocks.

Central banks changed all that.

Breaking Traditions

We’re taught that stocks and bonds tend to move in opposite directions.

Money flows into stocks and out of safety plays like US Treasuries and the US Dollar when they want risk.

The opposite occurs when they’re fearful.

Typically, this leads the two to have a negative correlation.

Correlations are measured on a scale from -1 to +1, where -1 means they trade perfectly in opposite directions, +1 perfectly in the same direction, and 0 they trade independent of one another.

Here’s a chart of that correlation between the SPY and TLT ETFs over the last 120 days.

What you’ll notice is that the correlation has been trending more and more towards zero. In fact, during the summer last year, the correlation was actually positive!

For long-term investors, this is a problem.

The negative correlation lets part of their portfolio rise when the other falls.

When that breaks down, they carry more risk.

Bonds Suck Big Time

For years, bonds outperformed their historical averages for two reasons.

First, the Federal Reserve purchased Treasuries outright as well as kept rates low.

Second, other central banks made their yields so unattractive, it made US treasuries the best choice out there.

The unprecedented Fed actions in 2020 sent treasuries to some of their highest levels in history.

With the Fed winding down its bond purchase program and set to raise rates, the upside potential is extremely limited with the downside quite large.

That’s why we’re seeing both bonds and stocks often sell-off at the same time.

The Bottom: Treasuries aren’t good investments these days. 

Instead, we prefer cash for safety or shorter duration treasuries to limit risk, such as 1-36 months (SHY).

Commodities (GSG) are also a good place for safety, especially with inflation rearing its ugly head.

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