The Bond Market Chorus Is Singing a Helpful Tune: “Never Catch a Falling Knife”

Interest rates rose quickly after being zero from 2009 to 2021. The 10-Year US Treasury yield followed suit. Despite Federal Reserve Chair Jay Powell communicating clearly, for a Fed Chair, and loudly, that he intends to keep rates higher for longer, investors keep rushing in to buy the dip. In this piece we propose a better strategy.

After falling for 40 years, investors seem caught off guard that the largest falling knife in history is now the 10-Year US Treasury Bond. Earlier this month, MKAM heard the Chief Investment Strategist of John Hancock at Future Proof forecast that the 10-Year yield would fall to 1% in the next 12 months. She recommended buying 10-Year US Treasury Bonds. Hopefully not too many investors listened as bond prices continued to fall since the conclusion of the conference.

While every week brings a new member of the financial services chorus onto Bloomberg, CNBC, and Schwab Network telling investors NOW is the time to buy longer term bonds, we counsel investors to continue to listen to the complete chorus: the bond market. The bond market is singing Jay Powell’s tune and telling investors to wait.

Below, we show two investment strategies since the end of December 31, 2021. This marks the time when the Federal Reserve very clearly told markets that they would soon embark on a prolonged interest rate hiking cycle to quell inflation. Ever since, with every rise, new investors have sought to jump in too early and got hurt. RIP Silicon Valley Bank.

Alternatively, for our clients, as part of our investment process, we utilize a simple trend signal to indicate to us when the knife is done falling and long bonds are safe to pick up. While buyers of 7-10 Year US Treasuries[1] are down -15% since the end of 2021, trend followers have not lost money. Encouragingly, since the dawn of the Greenspan Fed in the late 1980’s, trend following applied to the bond market has produced similar results: allowing investors to perform materially better than short-term bonds, while limiting exposure to large drawdowns. Bonds are meant to offer ballast to a portfolio. Not to be a source of losses.

[1] IEF is an ETF composed of 7-10 Year US Treasuries

We sit patiently and calmly on the bond market sidelines and wait for interest rates to finish their steady rise. In the meantime, our investors get paid 5.5% for low-to-no risk short-term US Treasuries. To generate positive returns and avoid large losses, tune out the loud individual voices fomenting bond market FOMO, and listen to the bond market chorus. We’ll report here when the tune changes.