Bonds Ain't What They Used To Be

Bespoke Investment Group sent out an email noting the escalated volatility in the iShares 20+Year Treasury Bond ETF (TLT). This got me curious about what the MOVE Index is doing. MOVE is like VIX for bonds. Here's a long term chart.

 

The only period where it was higher in recent times was during the Financial Crisis when yields were plummeting in reaction to the unknown of the crisis and the understanding of how far the Fed and Treasury Department would go started coming to light. It spiked to a similar level as now for a few days during the Pandemic Crash of 2020. The current lift that started in Q2, 2021 could be described as parabolic but somehow not quite a purely vertical like the other times it rocketed higher. The current move being 15 months so far versus two weeks in those other two instances is noteworthy.

That to me means that the volatility of interest rates could remain elevated for quite some time, a point I've made several times in the last couple of weeks. My belief is that volatility is escalated and that bonds volatility is as not reliable as it used to be which makes longer bonds less effective tools for buffering equity volatility.  I've repeated the point but the chart gives context to what I thought was going on.

I am not trying to guess where interest rates go. If anything, I'm saying interest rates are currently even less predictable than normal. If you're happy getting 2.5-3.25% in short dated treasuries, go for it, I did recently for clients and personally. A Treasury Note, as a opposed to a bond, will be far less interest sensitive than longer maturities and if 2.5% was a lousy entry point, you'd be bailed out very soon. That works for me.

When we talk about alternatives, there are all types out there. Some are bond market substitutes, the boring type of bond exposures that do buffer equity volatility. Others are volatile and tend to act more of a hedge with the potential to go up a lot if stocks go down a lot. An inverse index fund is the simplest example of the latter. If the stock market drops 30% an inverse fund will go up a lot, maybe 30%, maybe less or more depending on the daily compounding but up a lot. Something like merger arbitrage or convertible arbitrage will most likely look like a horizontal line with a slight tilt up or down (hopefully up) with the AQR Diversified Arbitrage Fund (ADAIX) being a notable exception. 

Some will want to trade longer bonds for capital gains. Go for it if that is your trade but that's not my trade. The point is just having less confidence for now in bonds. For years my concern was interest rates being at all time lows elevating the risk of longer bonds now my concern is equity-like volatility that could take prices in either direction but another run or two where equity and longer bond prices both go down a lot is on the table as this event is still unfolding and is a risk I want to avoid.