The bond market is very different today than it was last year. Central banks are in the midst of the most dramatic tightening of monetary policy in a generation, which has helped push yields on some risk-free U.S. Treasuries to 15-year highs (Jasinski, 2022). This reality has made fixed income attractive to investors for the first time in years.

Bond prices move inversely to yields, so the prices of bonds have been ugly. For example, the iShares U.S. Treasury Bond ETF is down 14.78% year to date. With the S&P 500 being down 21.62% year to date, the traditional asset allocation would still have investors in a losing position in 2022. In an on-air interview with Professor Jeremy Siegel with the University of Pennsylvania Wharton School of Business, he declared that treasury bonds no longer provide hedging protection against the declines in the stock market like they have for the last 20 years. Bond prices have been declining while stocks are declining, negating the once-beneficial asset class diversification. Given a choice to be in bonds or stocks, Siegel says stocks for the long haul.

Rick Rieder, the Chief Investment Officer of Global Fixed Income with BlackRock, says, “At the core of investing today is the fact that financial conditions are tightening.” The Fed knows it needs to deal with inflation, and that will require it to get to a place where rates are restrictive (Jasinski, 2022). The Fed can then pause interest rate hikes and allow for the system to adjust. This pause will not change the fixed income market because the rates will still be higher rates that are locked in long-term. There is, however, the potential for a more robust recovery in equity markets due to this expected pause.

“Buy the dip doesn’t work during quantitative tightening; you just keep getting new dips. The Fed is not your friend in financial markets,” Rick Rieder says. Based on our research, we think Rieder is correct. Fortunately, we have hedging strategies in place for our clients. Many people in the investing public are not familiar with the hedging techniques available to help protect their portfolios. While this environment is very unpleasant for most investors, we use a hedging strategy that mitigates the downside so our clients start from a better position when the markets improve.

Source: Jasinski, Nicholas. (2022). Bond Market Turmoil Could Last a While. How to Stay Out of Trouble. Barron’s.