Welcome to the September 2023 edition of The Broadcast!
This month is all about Bonds...no not James Bond...the ones that pay interest (although one might argue that they too can save the world - perhaps a topic for another time.) As a kid, I loved watching the James Bond films with my Dad and Roger Moore was my Bond (it was the 80's!) and Moonraker was the coolest because James had to save the world from space. So, apologies for the trip down memory lane...
Before we get to my thoughts on bonds, a quick recap of the month that was:
September marked the exciting start of another NFL season (49ers still chasing that elusive 6th Super Bowl Trophy...perhaps this is the year...finally?) and we've even had some sporadically nice weather in San Francisco...the stock market on the other hand had other ideas and didn't celebrate the return of professional football or the sunny weather here.
With the threat of yet another government shutdown (thankfully avoided in the 11th hour...for now), inflation concerns and the specter of higher interest rates for longer led to the worst month of the year with all major indices in the negative for the month.
The good news is that returns are all still positive year to date with the exception of the broad based bond market (as tracked by AGG in the charts above.) But wait a second, with all the news of interest rate hikes bonds must be paying more interest so why are they negative? In a nutshell, as yields (interest rates) on bonds go up bond prices go down (and vice versa.)
Hey that's a nice segue into 007...oh, sorry I meant bonds, interest bearing bonds (ok, I'll stop now):
One of the first things I learned about bonds a million years ago when I started my career was that there is an inverse relationship between their prices and yields. Imagine a teeter totter with interest rates on one side and bond prices on the other. As one goes up, the other goes down and vice versa.
This inverse relationship is exactly why the broad based bond market has had negative returns in 2022 and thus far in 2023. Eventually, the higher interest rates will help to even the returns out and in an even better scenario if interest rates go down from here bond prices will go up - both good things for investors.
Because of the threat of higher rates for longer, you may have noticed that I've continued to be overweight on short term bonds (as tracked by BSV in the September chart above.) Typically, because of their shorter life spans - shorter term bonds don’t swing as wildly as longer term bonds. You can see the difference in the year to date chart by comparing AGG with BSV
As long as the employment numbers stay strong and corporate earnings remain relatively strong (Q3's earnings reports will start to be released later in October) the odds this Fed will keep rates higher or even raise them again remain a strong possibility. I am in the camp, that if the Fed even sniffs inflation they will raise rates - stay tuned.
Additionally, in the current environment, short term bonds can be a great investment alternative for your traditional bank savings accounts.
I've mentioned this before, but short term Treasuries can be a great place to park at least a portion of your savings. Despite the trouble our government consistently seems to find itself in, U.S. Treasuries are still widely considered the safest investment on the planet and the interest paid (while Federally taxable) is free from State and Local taxes.
As an example, for every $100K earning ~5% APY via a Treasury, means $5000 in interest for a year! That's obviously a lot better than the 0.01% at Chase ($10/year) or 0.15% at Wells Fargo ($150/year.)
If you have a traditional bank savings account and want to explore Treasuries as an alternative, please reply to this email and schedule some time with me.
I have a million other thoughts about bonds - they are really fascinating once you get to know them - but will stop while I'm ahead. Speaking of which, if you thought my James Bond jokes were bad - just wait until I share my favorite bond analogy that involves everyone's favorite fictional archaeologist.
Until next time, take good care and please contact me with any questions!
Steve