Bull Case and Bear Case for Investing in Treasury Bonds Right Now

Today, I wanted to provide two opposing views of the merits of investing in U.S. Treasuries in today’s environment.

Whenever I make investment decisions for clients, I always try to consider arguments both in favor and against the investment. It’s important to understand both sides of any issue and do our best to remove our own personal biases and emotions from the decision. In this particular case, with regards to U.S. Treasuries, both sides of the argument contain valid points causing stark disagreement among even the most respected managers and pundits. Continue reading “Bull Case and Bear Case for Investing in Treasury Bonds Right Now”

Bond and Stock Behavior Throughout History

I think it’s important for investors to understand the historical behavior of the investments they hold in their portfolios. This understanding helps investors maintain realistic expectations of their investments going forward (both good and bad), invest more appropriately, and remain disciplined through up and down years. “Remaining disciplined” means not chasing returns in good years while not fleeing your strategy in bad years. Continue reading “Bond and Stock Behavior Throughout History”

Question I Was Asked In Several Quarterly Client Meetings

In my Q1 market review, I mentioned that both U.S. bonds and stocks were down together for the quarter, and that was a relatively rare occurrence. I mentioned that only happened 8 other times in the previous 30 years. This was concerning for a few clients.

The primary reason it was concerning for some clients is that I generally have portfolios positioned more conservatively than I would in a more “neutral” environment. In other words, I have a targeted range to which I am bound for each client and am currently positioned on the conservative end of that range for most clients. The reason for the relatively conservative positioning is that I am concerned about stock market valuations (i.e. stocks are about as, or more, expensive as they were in 1929 and 2000…depending on the metric).

So when both bonds and stocks decline together it makes folks nervous. After all, isn’t the idea that bonds will hold up when stocks are declining? To add insult to injury, bonds actually declined MORE than stocks in the first quarter. As a result, several clients asked me, “Why did that happen?” “Will it continue?” “Is this still the right strategy?” Continue reading “Question I Was Asked In Several Quarterly Client Meetings”

Bonds, Part 2: Corporate Debt Fundamentals Worsening

A couple days ago I emailed a commentary about how I’m managing clients’ bond sleeves. As a brief refresher, I’m avoiding high yield / junk bonds and over-weighting Treasury bonds relative to investment-grade corporate bonds. That commentary was very high level focused on the historical performance of each segment during times of economic and market stress. Today, I’m going to get a little deeper into the weeds.

Executive Summary:

  1. The credit quality of the investment-grade bond market is deteriorating
  2. Corporations have been piling on debt so leverage is at all-time highs
  3. High yield bond prices beginning to roll over

Continue reading “Bonds, Part 2: Corporate Debt Fundamentals Worsening”

How I’m Managing Bond Investments At This Stage in the Cycle

As discussed at length, I have significant concerns about U.S. stock market valuations and what that may portend for the next bear market. After all, the most reliable valuation metrics are indicating the U.S. stock market is more expensive than ever before (including 1929 and 2000).

Although valuations aren’t useful for short-term trading, valuations do provide insight into the potential severity of the next downturn. So whether the next bear market has already kicked off with the January 26th peak or starts 12 months from now, the key to understand is it will likely be commensurate with the extremity of current valuations (i.e. severe).

A couple proactive approaches I’ve offered for consideration to preserve financial independence is either (1) under-weight U.S. stocks in favor of other asset classes, including bonds, and/or (2) incorporate “put options” to insulate portfolios from a significant stock market decline. Today, I’ll focus on what I’m doing within the bond sleeve of portfolios I manage. Continue reading “How I’m Managing Bond Investments At This Stage in the Cycle”