{"id":8212,"date":"2018-10-08T23:12:24","date_gmt":"2018-10-08T23:12:24","guid":{"rendered":"https:\/\/fundamentalis.com\/?p=8212"},"modified":"2018-10-09T19:34:02","modified_gmt":"2018-10-09T19:34:02","slug":"bond-bear-market-learn-to-play-defense-with-bond-portfolios","status":"publish","type":"post","link":"https:\/\/fundamentalis.com\/?p=8212","title":{"rendered":"Bond Bear Market &#8211; Learn to Play Defense with Bond Portfolios"},"content":{"rendered":"<p><a href=\"https:\/\/awealthofcommonsense.com\/2018\/10\/checking-in-on-bond-market-losses\/\">Great article<\/a> from Ben Carlson, CFA picked up by Josh Brown of Ritholtz Wealth.<\/p>\n<p>In <a href=\"https:\/\/fundamentalis.com\/?p=8180\">this blog post<\/a> from a few days ago, here is what I was thinking of when evaluation the Bloomberg Barclays Aggregate (AGG), the bond market&#8217;s equivalent of the SP 500, i.e. the prime benchmark for the fixed income part of your client portfolios:<\/p>\n<p><em><strong>AGG&#8217;s periodic returns:<\/strong><\/em> (evaluating price, and all data courtesy of Morningstar, returns as of 10\/5\/18):<\/p>\n<ul>\n<li><em><strong>YTD:<\/strong><\/em> -2.60%<\/li>\n<li><em><strong>1-yr:<\/strong><\/em> -2.26%<\/li>\n<li><em><strong>3-yr:<\/strong><\/em> +0.91%<\/li>\n<li><em><strong>5-yr:<\/strong><\/em> +1.92%<\/li>\n<li><em><strong>10-yr:<\/strong><\/em> +3.50%<\/li>\n<\/ul>\n<p>Will we see a &#8220;nuclear winter&#8221; in Treasuries, bond markets and interest rates ? It doesn&#8217;t seem like it, but Ben Carlson&#8217;s article quantifies it better than I did.<\/p>\n<p>As readers can see though, it probably won&#8217;t take much of an unexpected move in Treasury yields to wipe out positive returns in the AGG for 3 &#8211; 5 trailing returns.<\/p>\n<p>Here is the composition of the AGG, which will give readers some insight to the benchmark&#8217;s convexity and duration:<\/p>\n<ul>\n<li><em><strong>Government:<\/strong><\/em> 30%<\/li>\n<li><em><strong>Corporate:<\/strong><\/em> 30%<\/li>\n<li><em><strong>Securitized:<\/strong><\/em> 40%<\/li>\n<\/ul>\n<p>The AGG&#8217;s duration is a little under 6 years, which means that for every 100 bp&#8217;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 &#8211; 5 year positive return for the AGG ? It could &#8211; the 5-year trailing return of 1.92% will disappear in a hurry.<\/p>\n<p><em><strong>Summary \/ conclusion:<\/strong><\/em>\u00a0The fact is though, we don&#8217;t know what the future holds and if inflation suddenly turns hot, particularly wage inflation, the bond market will have a problem<\/p>\n<p>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% &#8211; 10% position in the inverse Treasury ETF or TBF.<\/p>\n<p>Here is my favorite chart of the 10-year Treasury yield contract traded at the CBOE:<\/p>\n<p><a href=\"https:\/\/fundamentalis.com\/?attachment_id=8215\" rel=\"attachment wp-att-8215\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter size-medium wp-image-8215\" src=\"https:\/\/fundamentalis.com\/wp-content\/uploads\/tnxmonthly10518-300x151.png\" alt=\"\" width=\"300\" height=\"151\" srcset=\"https:\/\/fundamentalis.com\/wp-content\/uploads\/tnxmonthly10518-300x151.png 300w, https:\/\/fundamentalis.com\/wp-content\/uploads\/tnxmonthly10518-768x388.png 768w, https:\/\/fundamentalis.com\/wp-content\/uploads\/tnxmonthly10518-1024x517.png 1024w, https:\/\/fundamentalis.com\/wp-content\/uploads\/tnxmonthly10518.png 1917w\" sizes=\"auto, (max-width: 300px) 100vw, 300px\" \/><\/a><\/p>\n<p>Click on the chart to expand. The yield is right at the key resistance level as of last Friday, 10\/5\/18.<\/p>\n<p>The TLT (+20-year Treasury ETF) has already broken down. It&#8217;s well below multi-year lows near $116 &#8211; $116.50.<\/p>\n<p>Its looks like as of right now it will pay to play defense with bond portfolios in the next few months and years.<\/p>\n<p>Thanks for reading,,,<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Great article from Ben Carlson, CFA picked up by Josh Brown of Ritholtz Wealth. In this blog post from a&hellip;<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[190,63,211,50,62],"tags":[],"class_list":["post-8212","post","type-post","status-publish","format-standard","hentry","category-10-year-treasury-yield","category-agg","category-bear-markets","category-bond-markets","category-tbf-inverse-treasury"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"post_mailing_queue_ids":[],"_links":{"self":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts\/8212","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=8212"}],"version-history":[{"count":6,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts\/8212\/revisions"}],"predecessor-version":[{"id":8220,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts\/8212\/revisions\/8220"}],"wp:attachment":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=8212"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=8212"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=8212"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}