Let's Talk About Bonds


"Safe" Treasuries have had no better year than stocks so far in 2022.

While 2022 clearly has not been kind to stock investors, bond investors haven’t fared much better. The yield on 10-year Treasuries has approximately doubled over the past six months, now hovering around 3%. A Treasury purchased at the beginning of the year has lost more than 10% of its value. So much for the idea of Treasuries as a generic “safe asset.”

To some extent, a market decline is the natural consequence of tighter monetary policy. The volatility we have recently experienced hardly seems like a reasonable response to the Fed’s course corrections. Did the stock and bond markets completely fail to anticipate this inevitable change in the Fed’s posture? Once inflation showed up, the party had to wind down. It would be nice to cross examine the market on this topic, but we can’t.

In spite of the market’s poor reaction so far, the Fed must continue raising rates. Inflation remains stubbornly above the Fed’s comfort zone. Supply chains are not healing as quickly as hoped. While western countries are steadily relaxing their pandemic-era controls China has gone the other direction and reimplemented strict lockdowns in major cities, affecting an estimated 37 million residents. The effect on the Chinese, and world, economy has clearly been enormous, and industrial commodities like copper have declined despite systematic inflation in goods and services. There have been rumors that the zero Covid policies may soon be rescinded, and we certainly hope so.

There is a strong possibility that stubborn inflation, rising interest rates, and the negative “wealth effect” from a lower stock market combine to cause a U.S. recession. Bear markets and recessions usually go together, and we have almost hit bear market territory. If this does happen, we would rush to point out that all recessions are not created equal. Two quarters of slightly lower GDP—a very mild recession—could even be heathy if it helped to cure an inflationary spiral. There are worse things than an economy spinning its wheels a bit, a global pandemic for example.

So we're sticking with stocks, now and always. An investor in well-managed, growing companies -- like the financial data company, internet service, or media company profiled in the June 2022 issue of the Investor Advisory Service -- will outperform bonds as long as your holding period is suitably long-term. The risk of quickly changing course in an investor's portfolio runs the risk of making the turn at the wrong time, leading to disastrous results.

Reprinted from the June 2022 issue of the Investor Advisory Service stock newsletter, rated #1 for performance in 2021 by Hulbert Ratings.

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