Beware of Bears

Mike Zaccardi

THE BOND MARKET has had a turbulent year. Interest rates, which move in the opposite direction of bond prices, spiked in early 2021 on hopes of an economic reopening. The 10-year Treasury yield, which started the year under 1%, surged above 1.75% in March, before subsiding in the second quarter and the third quarter’s initial weeks.

Today, 10-year Treasury buyers can earn a smidgen more than 1.5%, far less than the 6.2% inflation rate. Those with significant bond holdings might be apprehensive about such a negative real yield. Unfortunately, if we want higher interest rates, there isn’t much we can do except increase our portfolio’s risk.

Things are no better overseas. Bank of America notes that global high-quality corporate fixed-income securities are on pace to lose 4% this year, factoring in both the interest earned and bond price declines. Meanwhile, world government bonds are on track for their worst year since 1949.

The funny thing about all these year-to-date statistics is that the starting point makes all the difference. Bond returns are positive across the board over the past six months. Vanguard Long-Term Treasury ETF (symbol: VGLT) has returned 6%. Even Vanguard Emerging Markets Government Bond ETF (VWOB) has eked out a 0.9% gain. Shifting the time period analyzed shifts the narrative.

Now is the time of year when the next-year forecasts trickle in from Wall Street economists and market analysts. Like clockwork, economists will probably forecast higher interest rates in 2022. These “expert” predictions might make you even more skittish about holding bonds. But consider this chart: “Bond bearishness has been a constant for decades, and horribly wrong for decades,” as researcher Jim Bianco put it last Friday.

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