Join The Bond Market Resistance!

Jason Zweig wrote an article titled How Not to Invest in the Bond Market. The title of course piqued my interest. This blog has pretty much evolved into 100 ways to build a portfolio without bonds. I've been like a broken record for years on the need to avoid bonds that have any sort of duration or at least be extremely underweight duration versus the typical benchmarks. 

The article devoted a good amount of space to bond market math, focusing on the pain of owning the iShares 20+ Year Treasury ETF (TLT) and bond funds in general. Bond funds have no par value to return to which might make them worse than individual bonds. An individual 20 year treasury bond bought when yields were at their lowest will return 100 cents on the dollar when it matures in 2040. There is nothing that says TLT must get back to the $171 dollars it traded at in 2020. The dividend that TLT pays will help but the capital put in to TLT in 2020 might be permanently impaired.

I'm not sure how long Jason has felt this way or if maybe he is new to the resistance but there were a couple of points in the article I want touch on. 

This quote from Jason surprised me. "It’s impossible to say for sure why so many people barged into long-term bond funds last year." Ok, well just about every pundit on TV and news print was saying to add duration. All these various talking heads from brokerage firms and the like were given their regular media platform and were regularly doing this and I have to believe that the clients they advise, directly and indirectly, did end up buying long term bonds funds last year. One of the articles in this week's Barron's quoted someone as saying something like bonds are more attractive than they've been in 20 years. Maybe they are that attractive, maybe not but I'm not sure how anyone could be confused by the amount of buying in 2023. 

After making the case that even the Fed doesn't know what interest rates will do, he said "...financial advisers are kidding you if they say they are 'positioning' your portfolio for a specific interest-rate scenario. If the Fed itself can’t forecast rates, why would your financial advisers think they can?"

This is an important point. For however long I've been a broken record on this, I've avoided trying predict anything since probably 2010, I learned a lesson at some point back then about how silly it is to try to predict interest rates. Just for fun, I Googled "Nusbaum bond still stink" because I think I've written a lot posts with that title. I found an interview I did with Seeking Alpha in late 2010 that made its way to NASDAQ.com. Here's the relevant excerpt.

Not much has changed in terms of my approach to bonds, but the manner in which alts have evolved has led me to more use of alts also, lately, pricing for individual issues over treasuries hasn't been great. I think you can see in that snippet that the focus was more on what we know and can be easily observed. That is certainly the case now. Longer term debt yields less than shorter term debt, volatility of longer term debt was extremely high, it is less so now but still high in my opinion, there was a consensus calling for lower rates on the front end and as we've all seen many times and as Zweig points out, being right about this sort of thing is very hard to do. 

Observing there is elevated risk and volatility is not the same thing as trying to make a prediction. It's about making an active decision about what to avoid. The risk that I've been concerned about since, apparently, at least 2010 may have never had a consequence beyond a couple of blips along the way. It turned out it did matter starting in late 2021. 

It turns out there might have been something to these observations I've been relying on. Alfonse Peccatielo, @macroalf on Twitter, posted the following.

With higher inflation, like we've had for a while, bonds don't offer the same kind of diversification benefit. The way I have been describing this has been to say that bonds have become less effective diversifiers than what they use to be due to volatility that has become unreliable.

The volatility that I perceive as unreliable leaves me unwilling to commit to intermediate and longer term bonds while they have a four handle. I guess I'm at the point of trying to assess what sort of yield it would take to be willing to extend duration which is not much different than the interview excerpt from 2010.

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