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Chart Advisor: Classifying Bonds

Chart Advisor: Classifying Bonds

Posted March 14, 2024 at 8:41 am

By Adam Koos, CFP, CMT, CEPA

Investopedia is partnering with CMT Association on this newsletter.  The contents of this newsletter are for informational and educational purposes only, however, and do not constitute investing advice. The guest authors, which may sell research to investors, and may trade or hold positions in securities mentioned herein do not represent the views of CMT Association or Investopedia. Please consult a financial advisor for investment recommendations and services.

1/ Looking at Bonds

I hesitated to write up a whole edition on bonds because not a whole lot has changed in the last few years, but for those who aren’t “in-the-know,” let’s start by getting up to speed.

If any of us received any financial education whatsoever, we were taught that stocks are risky, smaller stocks are even riskier, you’ve gotta’ be crazy to invest in commodities, and bonds… well, bonds are safe!

Perhaps this was true as interest rates fell from their highs in the 1980’s until the COVID pandemic began, but it’s definitely not the case today. 

You see, bonds and interest rates have an inverse relationship.  In other words, it’s not a matter of speculation or analysis… when rates go up, bonds go down – and when rates go down, bonds go up.  That’s it.  Pretty simple right? 

Well, it makes you wonder then… why is it that so many investors owned bonds this past few years as interest rates were almost sure to rise (and man… did they rise!), and as a result they stood by and watched the “safe” portion of their portfolio get vaporized in less than three years?

Let’s take a glimpse at reality…

The above chart is a snapshot of the iShares U.S. Aggregate Bond ETF (AGG), which is a good representation of the overall bond market here in the U.S. 

I start with this chart because it’s taken a milder beating than most bond investments out there, but being down -18% or more in what we’ve been taught is a “safe” investment over a three year period?  No bueno. 

As you can see today, a quick glimpse at this chart tells us that the bond market overall is printing lower-highs and lower-lows… the epitome of a downtrend. 

2/ Corporate Bonds

The next chart is a look at corporate bonds, so we’re drilling down into different bond sectors now.  Not much different here, is there?  Again… higher rates = lower bond prices.

Similar to the AGG chart above, we can clearly see lower-highs and lower-lows (again, a downtrend in my book), but what’s worse here?  Corporate bonds have been down more than -30% since their post-COVID peak.  Ugh… that’s rough. 

3/ Treasury Bonds

Alright, alright… maybe I’m not being fair.  Surely United States Treasury Bonds are safe, aren’t they?  I mean, they’re backed by the full faith of the U.S. government, so how bad could they really be?

Short answer:  Bad.

Long(er) answer:  All I see here are lower-highs and lower-lows (again), but worse yet, if you’ve held onto bonds since the post-COVID peak, this portion of your portfolio is down approximately -45% (FORTY-FIVE PERCENT!!!).  <sigh>.

4/ The Bottom Line

Enough is enough – isn’t there something in the bond market that doesn’t look and smell like, well… you know?

There are a few bond sectors that are showing some life, however, that doesn’t mean bonds are out of the woods yet.  As you can see above, this chart of International Sovereign Debt is actually printing higher lows and just this year, printed a major higher-high, so perhaps this is a glimpse into “hope” for the bond market turning around, possibly later this spring or summer.

Could it be turning around soon as a result of the Fed pausing interest rates (or even cutting rates in the near future)?  Possibly… but at the end of the day, until bonds “prove themselves” to me, they’re going to remain a no-touch in my book.

Originally posted on March 14th 2024

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