Trending
I’ve heard bitcoin referred to as “nerd gold,” so I guess today’s US Federal Reserve rate announcement today was the “nerd Super Bowl” or something like that. Count me in on the festivities, but…
I’m looking at something more big-picture:
-
Where we’ve been with interest rates. Not only the overnight rate the Fed sets that gets so much attention, but the entire US Treasury yield curve from 0 years to 30 years to maturity.
-
What’s happened to bond prices (as depicted by some ETFs shown below) during that rate hike era, which I’ve simplified to looking at yields across the curve as of yesterday (9/17/24 in blue below) and exactly 3 year prior (9/17/21). Quite a trip.
-
What happens next? Because whatever that is, between now and the US election, into next year and for the next few years, there’s one thing I am confident about:
BOND INVESTING AIN’T LIKE IT USED TO BE!
Rates move around a lot more. That’s because of who’s playing in the market sandbox now. Institutions, hedge funds, ETFs, algorithmic traders. They collectively contribute to making the whole market, including bonds, more like a casino than every before.
That’s not bad news. But it is something we need to adjust to as investors.
Now, with rates likely coming down, bonds may start to be that other total return asset that has some yield and can move like a lower-volatility stock.
That calls for some adjustments in thinking. Because I didn’t say “bonds go back to being like they used to be.” No way, I say! Bonds are just a different type of moving target for investors now. Not like the old days, where we could have applied a modern phrase like “high quality bonds and chill” to describe retirement portfolios.
I’m 60 years old and as noted, semi-retired. And I’ve been walking my readers and subscribers through that process of re-thinking retirement income investing for about 3 years. That’s why my personal portfolio (the only one I now talk about, after selling my investment practice 4 years ago, where I managed “other people’s money”) has been more like “T-bills plus other stuff” for the better part of 2 years, but the other stuff has been very productive.
But with the Fed now embarking on a different direction, and markets about to do…whatever markets will do…I felt this was a good time to make a few quick chart-enabled observations. I may be semi-retired, but I love this stuff and helping others learn it.
1st Chart (above)
Investors got used to the red line (3 years ago). Bonds were nothing but a place to hide from stocks. 2% a year for 30 years, with the US government as your creditor. Sign me up…not.
But now, in a historical quirk likely due to the nature of the pandemic and post-pandemic recovery, those with savings and assets have been able to collect 5%+ for sitting on their proverbial keisters (if you are under 40 and reading this, might have to Google a word there).
Now the curve might finally “normalize.” I’m already well-positioned if rates come down further after the Fed acts. But this is not about tomorrow or next week. It is about the only thing that matters to me as an investor:
How can I make as much as I can, while avoiding big losses along the way?
I think a trend shift to lower rates is a huge opportunity for a strong reward/risk ratio in different parts of the bond market, alongside my usual dividend stock work. I’ve been framing this up gradually for Sungarden subscribers through free posts, our paid service, and some live sessions we’ve done and will continue doing as this awkward time of the investment markets continues.
2nd Chart
For all of those investors that look at the S&P 500 return over the past decade or so, and are convinced that nothing bad can happen that doesn’t reverse itself quickly (“buy-the-dip”). Bonds were thought of that way for decades. Then this happened. Those are not annualized returns the past 3 years, they are cumulative.
3rd Chart
Now, Fed-Shmed, what’s the new state of bond/income investing? That’s too long a post. More like a mini-series. But the keys for now, as I look at the 10-year bond rate (the S&P 500 of bond-land), I see this (notes below):
-
Breakdown through narrow range in anticipation of Fed shifting to cuts from hikes. If you want hikes now, gotta watch football games.
-
Rates should slip at least a bit further, but then…
-
There’s a decent chance that pace picks up, due to any tick up in unemployment or other weak economic numbers. That changes the narrative from “Fed’s got it” to “they’re behind and the market is bringing rates down for them.”
-
The lower part of that chart says to me that we just recently moved to a lower trend in rates that is longer term in nature.