Nov 5, 2019
Long-term bonds will be a drag on portfolio performance, especially in target date retirement plan accounts, in the years ahead. Target date portfolios increase the percentage of bonds each year until bonds move closer to 80% of the portfolio at the target retirement date. Using today's 1.75% 10-year bond yield as a starting point, interest rates will probably be higher in the long-term, making purchases now and for the next few years very unattractive! As interest rates rise, bond prices decline. During the last nearly 40 years, since 1981, interest rates have declined, pushing up bond prices as well as all other assests, including stocks and real estate. That will reverse to the detriment of long maturity bondholders especially. Contact us if you want to discuss why target date funds may not be a good option for the long term.
Oct 2, 2019
Value stocks have outperformed growth stocks recently due to declining interest rates. These slower growth, higher yield stocks received a bid (an indication of more willingness to buy) since August. We also saw stronger bids for the consumer staples, real estate and utilities sector stocks. We think that as interest rates move back up, growth stocks will again outperform value stocks at this stage of the business cycle.
The dramatic rally in bond prices (declining bond yields), which were discounting gloabl recession fears, appears to have run its course. Yields have increased on long-term bonds; 10-year Treasury's low yield that was 1.46% is now 1.69% and the 30-year US Treasury's 1.96% low is now 2.10%.
It seems bond yields track manufacturing PMI's which are most sensitive to economic slowdowns and recession. Investors pile into long bonds preparing for recession only to reverse course when manufacturing recovers without producing a recession. This is often referred to as "the flight to safety".
The Federal Reserve cut the federal funds rate by 0.25%, the second such cut this year. The 5-year estimated inflation rate is currently running about 1.8%, giving room for the two rate cuts to bring policy rates closer to the inflation rate. We think inflation will increase over the next 6-12 months, but the Fed will not increase the federal funds rate; rather the Fed will allow a greater distance between the two rates to grow. A firmer core inflation will temper policy, easing expectation until after the election.