(Before we begin, can we agree that none of this is direct financial advice, and that past results don’t guarantee anything in the future? Thanks. Ok, back to the blog…)
I spent the first several years of my career as an advisor warning clients of one major risk headed for their portfolio. Now, it’s one of their biggest opportunities.
I came into the industry as the global economy was trying to mount its recovery from the Great Recession of 2008. Interest rates were super low, and likely to stay there for a while. But we knew they wouldn’t stay low forever. And with bonds making up a significant portion of the wealth of retirees and pre-retirees, we knew they were about to face one of the biggest risks since the Great Recession.
So, we began warning clients that when interest rates go up, bond fund values tend to go down. We didn’t know when this would hit, but we had a hint in 2020 when the U.S. Government printed more money than any other time in history. This money printing frenzy (predictably) led to one of the fastest and most severe inflation spikes in U.S. history. Then, with very little other tools in its toolbox, the
Federal Reserve increase interest rates faster than any other time in history.
What happened? Bonds as an asset class lost more value than any other time in history.
What did investors do? Park money in T-Bill money market funds earning north of 5%. It seemed like easy money. Those times are coming to an end.
On August 22nd, Jerome Powell said “it’s time for policy to adjust” in response to a softening job market and declining inflation. So, while trillions of dollars have been parked over in short term T-Bills and money markets holding the same, where does this leave bonds? Remember what we learned earlier:
When interest rates go up, bond values tend to go down. When interest rates go down, bond values tend to go up.
Does this mean run out and sell out of your T-Bills and buy bonds? Not necessarily. It simply means that what we and our clients have regarded with suspicion for so long, now may be turning into an opportunity worth considering.
It also doesn’t mean that all bonds and bond funds are created equal, and knowing what you own and why you own it will continue to be important, just as it has been for the equity side of your portfolio. If you’re a client already, we’ve already reviewed your portfolio.
If you’re not a client yet, give us a call.
Any opinions are those of the author and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise. Treasury Bills are certificates reflecting short-term (under one year) obligations of the U.S. government.
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