Is it Time to Own Bonds Again?

It’s hard to escape the feeling that inflation is starting to really matter to the U.S. economy, after decades of virtually no practical effect on investing and financial planning.

It’s more than just higher prices for steaks on the grill, a starter home or a tank of gas. Inflation can embed itself into the entire production chain and last for decades if not eradicated on time.

It’s likely you will hear a lot of news about the Federal Reserve raising interest rates, perhaps quickly, to quell the risk of out-of-control prices. That seems baked in at this point.

So what should you do as an investor?

Here, some stock market insight can help. Longtime traders note that “stocks tend to move according to emotions, while bonds are moved by math.”

What does that mean? Well, think of it this way. Stock prices can be volatile for sure.

But bond prices move a lot more predictably, and they move in the opposite direction of yield.

Bond prices up, yields down and vice versa: Yields up, bond prices down.

That relationship was easy to see over the past several decades. After peaking in the early 1980s — the last time the Fed had to ratchet up rates dramatically to stop inflation — bond yields have been steadily falling.

Sure, there have been ticks up and down, but the straight-line from then to now has been very clearly toward zero, where it was stuck for quite some time.

That means bond prices were trending toward a peak from which they could really only decline absent a serious and unsustainable anomaly, such as negative interest rates.

Interest stream

Yields were low because the Fed wanted them to be there. Our central bank, and many others around the world, has had a policy of buying bonds in order to keep interest rates low.

Here, it was done in part to avoid the worst of the 2007 housing crash, and then again to blunt the economic impact of COVID-19.

For bond investors that has produced a one-way trade that meant ever-rising bond prices but very little income from holding bonds. In fact, many long-duration bonds produced a loss after inflation.

It’s impossible to say what will happen next in any market, but the Fed seems committed now to a return to bonds that pay interest in line with historical trends. It will take a while to get there, but that’s directionally where the monetary authority says it wants to go.

The goal is to strangle inflation before it gets entrenched. But the secondary effect will be that bonds again pay an interest stream. There will be more interest in owning them as rates rise.

Exactly when to buy back into the bond market is a matter of measuring your own tolerance for risk.

A financial advisor can help you develop a strategy for diversifying your investments, including owning bonds, that can take place in steps over time.

Information presented is for educational purposes only for a broad audience.  The information does not intend to make an offer or solicitation of​or the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. MarketRiders (dba Sogotrade Asset Management) has reasonable belief that this marketing does not include any false or material misleading statements or omissions of facts regarding services, investment or client experience. MarketRiders (dba Sogotrade Asset Management) has reasonable belief that the content as a whole will not cause an untrue or misleading implication regarding the adviser’s services, investments or client experiences. Please refer to our Firm Brochure (ADV2) for material risks disclosures.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, nature and timing of the investments and relevant constraints of the investment. MarketRiders (dba Sogotrade Asset Management) has presented information in a fair and balanced manner.

The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass.  Any opinions, projections, or forward-looking statements expressed herein are solely those of MarketRiders, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.