After another week of bizarre behavior from the President that brought scenes that harken back to those only seen in disorderly regimes, one wonders what else is left in his Presidency? With his legacy tarnished beyond repair and bringing to an end, by all counts, the most denigrating four years in American history by any President, the country is bracing itself for the damage he could cause in the next 10 days that will make us cringe, cry, scream and suffer but, will not matter one bit to the man himself.
Despite the erratic behavior at the White House, the markets seem to be looking ahead beyond Jan 20th when Biden takes over and brings normalcy back to Washington. With the Senate and the House now securely behind the him, all signs are that Wall Street had it right in posting record highs in the indices entering the year. But, the prospect of higher government spending has ignited a sharp rise in Treasury yields indicating that inflation may be on the rise after years of staying flat.
What will this mean to bond investors?
Future Wealth’s View
With both 30 year and 10 year Treasury yields inching higher, investors who hold bonds are going to see the value of their holdings drop. The 30 year treasury bond has long been a hedge against stock market volatility. But, with the yield at ~1.8 percent, it hardly matches the return of a simple S&P index ETF that posted ~15% return last year. Continuing to stick with a bond heavy position only means that the portfolio will likely underperform again this year.
This is where a cookie cutter approach that big bank advisors provide falls apart. Going for a 60-40 stock/bond works well when inflation and interest rates remain stable. However, with ideal conditions for continued growth in the stock market, the prospect of higher inflation could make the bond market a poor near term investment. If one is still not convinced, the fact that the Fed is encouraging the economy to run hot with inflation above the 2% target to balance out the long period of below target inflation in recent years, may be a solemn reminder.
It is time to rebalance the portfolio, if you haven’t done so already.