Some things in life just get talked up too much to ever live up to expectations. Whether it’s food at a restaurant that was supposed to be great or the ending to a TV show that was supposed to be epic (cough Game of Thrones cough), life is fraught with these little letdowns that leave you shaking your head.
The investment community is going through one of those right now, sighing a collective “You’ve got to be kidding me.”
Since Interest rates were lowered to zero to help come out of the Great Recession of 2008 there has been one point of discussion in the bond world that has not ceased: only one direction to go from here. The great bond bull market of the 80’s and 90’s shall end. Bonds will no longer play their part in a portfolio because as interest rates rise, bond prices will fall, lowering their total returns.
This was a certainty that gave rise to tens of thousands of new investment products trying to replicate this soon to be lost part of the portfolio. Hundreds of millions of dollars flowed into these products hoping to be protected from the bond world firestorm to come.
So, what happened? Well, nothing for 6 years. But then in 2016 rates started to rise! Here it was, it’s finally happening! Core fixed income beware! The fed funds rate hit 2.5% by then end of 2018 and the 10 year treasury was at 3.23% in October of last year. Surely this is the new trend!......or not.
After this month’s fed meeting, futures are showing a 100% certainty of a rate cut in July to perk inflation back up. Analysts are expecting as many as 2 more cuts by the end of 2020 to continue to bolster the global economy. And, by the way, the 10 year treasury yield is sitting back around 2% again which has been about it’s average since 2011.
There you have it, one of the most talked about bags of nothin’ I’ve ever seen. Rates did poke up a little bit in the long term but nowhere near a level that would jeopardize a bond portfolio. And with this new Fed that doesn’t want to cause a recession, they could be fluctuating around this point for quite some time.
So, what did we learn? That endings to shows can be botched beyond all human imagination? Maybe.
We learned once again that investing involves taking the bad with the good and that even the most sensible and accepted ideas can be dead wrong. Nobody can predict the markets; we just have to invest in a way that we are comfortable with and are confident will lead us to our goals.