On December 9th bonds fell out of the top half of
my research groups for the first time in 11 years. Prices started dropping in the summer and
accelerated with inflationary concerns about the incoming administration.
Wall Street has been waiting for this shoe to drop for three
years. But for all the institutional
noise, individual investors have limited choices. I’d like to spend a few minutes talking about
why and what they can do about it.
The current bond bull market is 34-years old.[1] For my entire career, bonds have been the
safe haven when other assets were too risky.
Entire industries – 401(k)s, wrap-accounts, variable annuities and many
others – were created with virtually no contingency plans for when the bull
would end. Thousands of these products must
own at least a certain percentage of bonds – for older investors, mostly
bonds.
This is good news.
Profits we booked over the last 34 years were prepaid interest we won’t
get later. We’ve squeezed about as much
as we can out of this magnificent bull.
If those gains turn to losses, maintaining fixed percentages of bonds
will be expensive for those of us with more than a few gray hairs.
The next battle happens between the ears.
Expect business, marketing and even regulatory pressure to
maintain those percentages as-is. They have
their reasons. You have yours.
The investments you use to replace your bonds need
disciplines of their own. Decide which
of them can keep you moving towards your goals and build the support system to
use them well. sh
[1]
This chart shows the
current rate on 10-year US Treasury Notes going back to 1953. From then until 1982, bonds endured a
difficult bear market. From then on,
bonds have enjoyed an unprecedented bull market. Where it started looks a lot like where we
are now.
Please remember; bond
yields and prices work inversely. Yields
rise because bond prices fall. The old
owner’s loss is the new buyer’s gain.
Yields fall when bond prices rise because the new owner has to pay more
for the same future cash-flows.
The opinions voiced in this material are for general information only
and are not intended to provide specific advice or recommendations for any
individual. All performance referenced is
historical and is no guarantee of future results.
Bonds are subject to market and interest rate risk if sold prior to
maturity.
