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Bond Market Commentary

See the forest through the trees

By Doug Drabik
June 27, 2022

It is easy to get caught up in the hype. Why let the facts ruin a good story, right? The statement, “bonds are doing poorly”, erroneously is mingled with, “stocks are doing poorly”. We are inclined to think competitively, and to outdo our opponent whether that is in a tennis match, in a card game or in the investment world. Misunderstanding the actual meaning of “bonds are doing poorly” may mislead an investor away from long-term plans.

I would expect that our readers are concerned about finances on a long term basis. Although it is fun to predict and gamble on the next market move and enjoy the instant gratification of investing in that stock where the price explodes on some extraordinary event or discovery, the reality is that sticking with a long term plan is more likely to grow our wealth than some astonishing speculation. Long term planning applies to all of our assets and maintaining an appropriate allocation balance may improve the likelihood of long term financial success.

For years bonds were doing well; however, what that means in finance speak, is that bond prices were going up and therefore yields were going down. Total return investors benefitted from bond price appreciation. The long term investor felt the security of positive market price statement results. The reality is that long term investors’ greater benefit was being locked into higher rates in a falling rate environment. The undesirable event was having money or cash flow that had to be reinvested into lower rates. It created portfolio imbalance when investors turned away from balanced allocations in search of higher returns.

Now I hear the term “bonds are doing poorly”. I borrow a Bruce Willis expression in response, “yippee ki-yay!” I say this because of the excitement and emphasis that we investors should feel when you hear “bonds are doing poorly”. What that means is that yields are doing well. Reinvesting cash flows or new cash can now push portfolio yields upward. You can get buried in guessing when or if a recession is coming, whether inflation has peaked, timing the end of the Ukraine/Russia war or worried about the next pandemic type news and miss the opportunity right in front of investors. Yields have more than doubled since the start of the year, with 4.50%-5.00% yields that are obtainable portfolio additions. Think long term. Relish in the detail that bonds are doing poorly, meaning increased yields can improve portfolio income and cash flow. See the yield through the pricing hype. Buy and hold investors don’t benefit from monthly statements that report profitable market pricing but rather from the income generated by the holdings. This chart demonstrates basic laddered yield improvements from the start of the year to the present. Yields are a welcomed option for long term investors.

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