I’ve recently started adding more bond funds to my portfolio. I haven’t done this in about two years now.
This goes against what everyone is saying, it’s assumed both inflation and interest rates go higher from here. Many believe that since the interest rates are already so low, that the upside on bond funds is seriously capped.
However, a few things:
1)The FED is still buying over 80 billion Treasuries a month and has committed to doing this. This will drive interest rates down if it continues at the same pace. My prediction is the FED continues to buy more until it owns an even larger percentage of the Treasuries market (reducing supply).
2)The 10 year is at 1.45% as of today, it can still fall back under 1% and lower. Keep in mind the low last year was around 0.5% I believe people are wrongly discounting that this can’t happen from here.
3)Intermediate and Long-term Treasuries have a NEGATIVE correlation to the stock market. They offer protection and cushion to the OVERALL PORTFOLIO performance.
SO WHAT DID I DO?
I started a new position in TLT. As far as bonds go, this is of course the most risky move, as it is the long-term duration and most sensitive to interest rate rises. On the other hand, it’s the one that stands to earn the most if interest rates fall again. I believe they will.
Just a quick mention, I bought TLT back in December of 2018 and rode it for some INCREDIBLE gains all the way until the end of 2019. Remember this is where the FED tried to raise rates but it caused the market to correct and they were forced the other direction.
My prediction is that something similar will happen over the next year or rates will go LOWER from here. I have no way of knowing for sure, but I suspect some of the inflation we are currently seeing is transitory as the FED has said. Much of it is due to supply line issues, and in some cases, not enough workers available to do the job of getting all of the materials.
I’m also still adding to my VBILX position in my ROTH IRA. This is an intermediate bond fund I’ve had for about a year and half now. This is a much safer choice, although it has a yield of over 2%. This is because the quality of bonds it invests in is a bit lower. VBILX is pretty close to a “cash account” like a savings with minimum downside. To reiterate the risk here is the return gets eaten by inflation.
I will end by saying I don’t think bonds like TLT are something you buy and hold forever. I do strongly believe bonds have a place in anyone’s portfolio and I can’t see myself ever getting rid of them.
“You can’t time the market” is a saying commonly reiterated. Yet, by not holding bonds, one is timing the market. They are assuming the insane bull run of the last decade will continue, they are assume bond yields MUST rise. However, we are in uncharted territory as a nation with the FED expanding is balance sheet to unprecedented levels, with valuations of some stocks at insane levels, with demographics and political tensions we haven’t faced before. Who knows what will happen from here? I don’t. That is why I’m choosing to hold bonds regardless if most are speaking out against them.