I’m undertaking a 1000-day reinvention project, blogging here daily to track my progress. In Wednesday Wealth, I write about money management, retirement, estate, and long-term care planning.
I am 100% unallocated to bonds right now in all of my accounts. The charts look terrible and my macro outlook aligns with the charts.
Some pundits might tell you now is a great entry point for bonds, because they look so cheap! Yields are up, which means prices are down. But yields could still go up a lot more, and typically, during inflationary periods they do, because investors demand a premium for holding onto an asset that is losing purchasing power over time.
Consider what happened after September 1981 vs after December 1959:
In the 1960s, inflation was increasing while in the 1980s it was falling after reaching incredible heights in the 1970s:
For bonds, what’s important is not the general level of inflation but rather the direction: is it going up or down?
There are good reasons to think that inflation will go up in the coming years, not come down:
- Deglobalization (tariffs, industrial policy that encourages self-sufficiency rather than trade reliance, restrictions on use of non-domestic technology) means that consumers and producers face higher prices than they would in a more globalized, trading-oriented world.
- Scarcer labor due to immigration controls and the aging of the population can lead to increases in prices, especially in labor-intensive services.
- Debt-burdened governments have incentive to hold interest rates down instead of allowing them to adjust to limit inflation.
- Rising demand for commodities from data centers, electrification, and manufacturing makes for higher prices for everything.
- Worldwide geopolitical conflict leads to inflation through increased defense spending, energy and other commodity supply shocks, and reduced trade.
- The pandemic and its aftereffects including excessive stimulus spending led to increased inflation expectations, which can feed on themselves.
The one scenario where one wants to be holding bonds is when governments start engaging in financial repression — holding down bond yields through various means in order to be able to service their debt and keep nominally growing an economy — this can lead to an immediate price increase in bonds you hold. But long-term, you will have a real loss, as income from your bond doesn’t compensate you for inflation.
For now, I feel confident not holding any bonds (or bond ETFs). Anyway, I try not to rely on predictions but simply use signals to tell me what to do, and my signals say: no bonds right now.