How ‘bout Those Bonds!
November 1, 2024
By Robert Wiedemer
In the fall season of any year, that terminology is usually used in reference to a baseball team. As in “How ‘bout those Dodgers! Pretty impressive team!” And they were pretty impressive. Although there’s no question the Yankees did a lot to contribute to their success by allowing FIVE UNEARNED RUNS in one inning in a make-or-break game. Without those FIVE UNEARNED RUNS the Yankees would have handily trounced the Dodgers – at least in that game after pounding the Dodgers in the previous game.
But so much for baseball. The season is over. Now I can say “How ‘bout those bonds!” Well, they suck and have for four years. It’s a terrible record. No excuses. No offsets like “stocks have done poorly too.” In fact, stocks have had a stellar rebound in the last two years.
Bond Performance Has Been Abysmal, but Stocks Have Been Magnificent – It’s Easy to See Why I Have Not Recommended Buying Bonds and Highly Recommended Buying Stocks; and I Haven’t Changed
No, despite all sorts of positive pitches for bonds from very smart bond analysts (the depth and strength of bonds’ pitching roster is incredible!) they have failed to perform for four straight years. The pitches have worked to greatly encourage beleaguered bond investors to buy bonds. Total assets in the 20 year US bond ETF, TLT, have risen from $10 billion in 2019 to $60 billion today. However, those beleaguered investors are increasingly beleaguered since the ETF has lost value in EVERY ONE of those four years.
To make the damage more glaring, the TLT ETF is down almost 48% from its peak in April 2020. And to pour salt in the wound of the poor investors who fell for the advice of the outstanding and deep roster of bond pitchmen, let’s make the comparison to the S&P 500, which is up over 100% since April 2020.
It’s no surprise, that after such an abysmal performance, bond pitchmen are having a tougher time making their pitch now. In fact, a couple of home run hitters have stepped up to the plate to face off against the bond pitchmen and are actually shorting bonds. Those home run hitters are the well-respected hedge fund managers, Paul Tudor Jones and Stanley Druckenmiller.
Now, add to that, another big problem for bond pitchmen. The Fed lowered interest rates for the first time since early 2022 and by more than expected – one half percent. And, what happened? Did bond values soar as the pitchmen would want you to believe? No. In fact, bond values fell because the 10 year rate for bonds rose by one half percent.
Now professional bond investors should know that could happen since lowering the overnight interest rate has no direct connection to lowering the 10 year bond interest rate. The long term bond’s interest rate is directly affected by the Fed buying bonds or reducing sales of bonds. The Fed did make a modest reduction in bond sales in the summer but has made no more reductions since then. Hence, no decrease in the 10 year interest rate and upward pressure on the 10 year rate from Congress continues.
Massive Congressional Borrowing Puts CONSTANT Upward Pressure on the 10 Year Interest Rate and That Pressure Will Not End
With Congress continuing to increase its already massive sales of bonds to support their borrowing habit, the 10 year interest rate is under CONSTANT upward pressure. If the Fed continues to sell bonds at its current rate, the 10 year interest rate will inevitably rise, thus forcing down the value of bonds.
However, I have some good news for beleaguered bond pitchmen and their followers: The Fed will not let the 10 year interest rate rise over 6%. Hence, there will ultimately be an end to massive losses on bonds.
But there won’t be any long term gains. There will be plenty of short term trading gains in bonds as there has always been. In fact, the potential for short term trading gains in the last few years is bigger than it has been for many years prior to 2020. That’s because bond values are moving around a lot. Great for traders. Disaster for long term investors. But one caveat: You have to a good bond trader and not believe the bond pitchmen.
In fact, even before rates rise to 6%, the Fed will likely get nervous when rates rise to 4.5% and certainly at 5% or 5.5%. They will likely reduce bond sales or even eliminate them. They may even start buying bonds. However, if rates hit 6% they will do “whatever amount of money printing it takes” to keep bonds at or below that rate. Ten year interest rates above six percent would do serious damage to the banking system and economy.
I also have good news for those who choose stocks instead of bonds as I highly recommend. Your gains will continue, in part because investors will eventually get tired of bond losses and even tired of simply seeing minimal gains while stocks soar past them. It will take time to change bond buying habits, but ultimately some bond investors will move their money from bonds to stocks. That will further add to the money moving out of poorly performing foreign stock markets and disastrously performing commercial real estate.
Not that stocks aren’t bothered by rate increases. They are. Anytime long term interest rates rise, stocks will see downward pressure short term. However, stocks can easily adjust to higher interest rates, as shown in the past couple of years, whereas bonds cannot, as shown in the past couple of years.
Upcoming Presidential Election
I know that baseball is not the only news item on people’s minds in the fall since every four years we have, in addition to the World Series, the Presidential Election!
On that I have very little to say other than what I said in June. The stock market will do better under Trump than Biden. I will simply update that to say that the stock market will do better under Trump than Harris for basically the same reasons I gave earlier in June.
It’s just not worth saying more until we see who actually wins. After that, I will have more to say.
I can make a wild guess about the outcome which is that Harris wins the popular vote, and Trump wins the electoral vote. I really have no solid basis for that prediction, although I can say that the polls usually underestimate the strength of Trump’s support among undecided independents in the three key deciding states for the electoral college: Wisconsin, Michigan and Pennsylvania. Just a few undecided votes in one of those states may decide the entire election.
I’ll be candid and say I’m not sure that is the right way to elect a president. And, clearly, the vast majority of people agree with me because in every other election in the US, whether it is local, state or federal, an electoral college does not decide the outcome. But that is the way our presidential elections are decided. Hence, the reason for my prediction.
Or Trump could win it all or Harris could win it all. I don’t know. It’s a coin toss election. And, I might add, a coin toss that hardly seems to bother the stock market. As of today, the S&P 500 is up 27%. The market clearly knows that either candidate could win. Just as clearly it sees neither outcome as particularly devastating to the market, or it would not be up such an astounding amount.