Bond Bear Market – Learn to Play Defense with Bond Portfolios

Great article from Ben Carlson, CFA picked up by Josh Brown of Ritholtz Wealth.

In this blog post from a few days ago, here is what I was thinking of when evaluation the Bloomberg Barclays Aggregate (AGG), the bond market’s equivalent of the SP 500, i.e. the prime benchmark for the fixed income part of your client portfolios:

AGG’s periodic returns: (evaluating price, and all data courtesy of Morningstar, returns as of 10/5/18):

  • YTD: -2.60%
  • 1-yr: -2.26%
  • 3-yr: +0.91%
  • 5-yr: +1.92%
  • 10-yr: +3.50%

Will we see a “nuclear winter” in Treasuries, bond markets and interest rates ? It doesn’t seem like it, but Ben Carlson’s article quantifies it better than I did.

As readers can see though, it probably won’t take much of an unexpected move in Treasury yields to wipe out positive returns in the AGG for 3 – 5 trailing returns.

Here is the composition of the AGG, which will give readers some insight to the benchmark’s convexity and duration:

  • Government: 30%
  • Corporate: 30%
  • Securitized: 40%

The AGG’s duration is a little under 6 years, which means that for every 100 bp’s move in Treasuries, the AGG should move up or down 6%. Does that mean a 100 bp rise in the 10-year Treasury yield could wipe out the 3 – 5 year positive return for the AGG ? It could – the 5-year trailing return of 1.92% will disappear in a hurry.

Summary / conclusion:┬áThe fact is though, we don’t know what the future holds and if inflation suddenly turns hot, particularly wage inflation, the bond market will have a problem

As this blog has detailed repeatedly, clients are in a Schwab higher-yielding money market, the JP Morgan Strategic Income Fund, T-Bills (up to 1 -year maturity) and a 5% – 10% position in the inverse Treasury ETF or TBF.

Here is my favorite chart of the 10-year Treasury yield contract traded at the CBOE:

Click on the chart to expand. The yield is right at the key resistance level as of last Friday, 10/5/18.

The TLT (+20-year Treasury ETF) has already broken down. It’s well below multi-year lows near $116 – $116.50.

Its looks like as of right now it will pay to play defense with bond portfolios in the next few months and years.

Thanks for reading,,,


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