After the longest bond market rally in history (4,571 days) from January 2000 until late July 2012, the US long bond is quickly approaching bear market territory for the first time in over 13 years. By standard definition, a bear market is a decline of over 20% that was preceded by a rally of at least 20%. As shown in the chart below, there have been six BOND bull markets and five BOND bear markets since 1980. Since its peak on July 24th 2012, the long bond is currently down almost 15% … well on its way towards full bear market territory
Investors need to be aware that while bonds are a core part of any diversified portfolio they can have bear markets just like stocks! We have encountered tailwinds for bonds (meaning when rates go down, values go up) since the 1980’s when mortgages were at 14% and you could purchase 30 year treasury bonds with 15% interest. Interest rates have been cut to zero by the Federal Reserve. Below is another fantastic chart visualizing long bond bull markets (green) and bear markets (red) over the last 30 years. Historically it’s been a very good time to be invested in bonds and investors have reaped the reward of income plus capital appreciation as rates have decreased over 30 years. Looking ahead we need to be cognizant of rising rates and their effect on investment portfolios.
At Clearview Wealth Management, we typically steer clear of long bonds as we believe they have historically had poor risk-reward tradeoffs. We have prepared our client portfolios by shortening bond maturities, adding floating rate investment-grade bonds and other floating rate Hybrids. Additionally, we are tactically under-weight certain areas within our Fixed Income, while tactically over-weight areas in Hybrid and select Equity sectors, which have historically shown the ability to provide downside protection during rising rate environments.
While we expect choppy returns over the short-term as the Federal Reserve starts tapering and eventually normalizing/raising short-term interest rates, we still believe in the merits of bonds as income generators and as safe-havens in times of equity market stress.