Making sense of the markets this week: March 22, 2021

Investing in bonds has become “stupid?”

Now that inflation fears and the threat of a rising-rate environment (bad for bond prices) are on the table, many are suggesting that bonds are a bad investment. Many market experts will go even further to suggest that bonds are “the worst investment ever,” and an investment in bonds today is just plain “stupid.” 

In fact, even Warren Buffett in his annual investment letter suggested that bonds are a terrible investment. (We discussed that letter here on March 8.) Buffett’s exact quote: “Fixed-income investors face a bleak future.” 

And this LinkedIn post from Ray Dalio, a well-regarded hedge fund manager certainly caught my attention. I strongly suggest that you read that full post. From Mr. Dalio… 

“The world is a) substantially overweight in bonds (and other financial assets, especially U.S. bonds) at the same time that b) governments (especially the U.S.) are producing enormous amounts more debt and bonds and other debt assets.… Their overweight position in U.S. bonds is largely because of the ‘exorbitant privilege’ the U.S. has had being the world’s leading reserve currency, which has allowed the U.S. to overborrow for decades. The cycle of becoming a reserve currency, overborrowing, and being over indebted threatening the reserve currency status is classic.” 

The investment world has been in a bond bull market from the early 1980’s. It’s all we’ve known. Again, from Dalio’s LinkedIn post … 

“If bond prices fall significantly that will produce significant losses for holders of them, which could encourage more selling. Bonds have been in a 40-year bull market that has rewarded those who were long and penalized those who were short, so the bull market has produced a large number of comfortable longs who haven’t gotten seriously stung by a price decline. That is one of the markers of a bubble.”

We are not used to getting hurt (or, at least seriously hurt) by our bond holdings. We suffer from that recency bias. We should keep in mind that bonds change in price and can carry risk. Even a traditional balanced portfolio could deliver no real (inflation-adjusted) returns for several years. 

Low yields bonds offer very little moving forward in the way of returns, even if rates stay somewhat stable. On their own, bonds are obviously not a great risk/reward proposition. 

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