• John Hawver

Vax Populi > Bond Bull

It has been a while since I last posted. My apologies. 2020 has been challenging, but I'm back.


I'll re-start with a quick short post on... bonds. Investors and traders have made it through a volatile year. Vol can be good, it presents a lot of opportunities if you can keep our head clear. And now that we've gotten through the election, things are clearing up. There's a vaccine on the horizon and the markets seem ready to rally; except maybe for bonds.


Using an equity risk premium comparison to stocks, bonds look expensive.



The US Treasury bond curve, the 10y yield minus the 2y yield is steadily rallying (so longer duration bonds are selling off - yields up, prices down); the bond market expects future inflation.



The Feds' own Taylor model has bounced back from below zero. If congress passes more T-sized stimulus packages, expect the Fed to end up in a position where short-end rates need to rise; this is basically a "good" economic problem to have.



Finally, the Fed's balance sheet doesn't look to be growing significantly anymore; if the Fed isn't buying bonds, who will?



So, owning bonds right now, and over the course of the next couple of years, could be challenging as the world rebounds economically. This will present challenges for the typical 60-40 portfolio and many investors will seek other yield-producing instruments.


Good luck out there!


John



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