Cash vs Bonds

Barron's looked at the merits of holding cash versus bonds which fits in here very well. The article was fine for the most part. It generally tilted toward cash between the two, until the end when it quoted an investment advisor who started to extend duration a year ago, unfortunate timing. 

"But Elser isn’t swayed from her belief that bonds make more sense than cash over the long run. She notes that bonds have outperformed cash over much of the past 20 years." Um, insert the googly eyes emoji here, yes bonds have actually outperformed cash over much of the last 40 years as interest rates were almost a one way trade going from the mid-teens for the ten year Treasury down to 58 basis points at its low. That one-way trade is over. Maybe bonds should be bought here (not with my clients money or my money) but not because of what happened over the last 20 years or, more correctly, 40 years. 

“People loved owning bonds because of the appreciation when interest rates declined,” she says. “Now we’re five years out, and people think bonds are terrible.” So people liked bonds when they were going up? Now they don't like them because they are going down. Huh, no one could have known. 

We say it like four times a week here, bonds with duration have become sources of unreliable volatility or as Kristy Akullian from Blackrock said, duration has become an "unreliable source of diversification." The Barron's article made no mention of the type of bond market proxies we discuss here all the time. Here's a chart of a bunch of them compared to iShares 20+ Year Treasury ETF (TLT).

The names don't even matter, we talk about all of these all the time. Since it's Yahoo, it's price only. Toward the left end of the chart when TLT was yielding 1%, the proxies were mostly yielding 3-4%. Toward the right end of the chart. as TLT now yields in the 3's and 4's, the proxies are mostly yielding in the 5's and 6's with less volatility and more reliable diversification benefit for equity exposure. Yes, there are varying degrees of risk but we talk about that as well as pounding the table on the importance of diversifying your diversifiers. 

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