Navigating Turbulent Markets

With all of the economic and political uncertainty in the US right now, we would like to share a truism that senior bond traders tell junior ones which is true now: the saying goes "the long end leads and the short end follows".  

The long end, for the purposes of this discussion, is defined as bonds with maturities greater than 20 years, like the one of the most liquid US bond ETFs, iShares "TLT"  (https://www.ishares.com/us/products/239454/ishares-20-year-treasury-bond-etf).  The short end, conversely, is characterized by bonds with maturities less than 3 years, like the equally popular iShares ETF "SHY" (https://www.ishares.com/us/products/239452/ishares-13-year-treasury-bond-etf).  Over the three months, the price of TLT has declined by 8.8% and SHY by 0.9%.  Said differently, long end rates have gone up by more than short end rates as prices and yields are inversely related.

So "what's happening?"  There are three narratives that have changed in the last few months.  First, long yields have gone up since the Fed started cutting rates in August of 2024, which is an unusual circumstance.  Bond buyers are telling the Fed that the recent cuts are not necessary and may lead to a resurgence of inflation.  Effectively, this is a vote of no confidence in recent Fed policy.  The second narrative to change is that the bond market has, to some extent, given up on the belief that inflation will continue to fall and that employment growth will soften.  Yet another strong payroll number last Friday caused bond dealers to revise their rate cut forecasts for 2025.  Thirdly, there is a great deal of uncertainty about what might happen when Trump takes office later this month.  Will tariffs and tax cuts create upward pleasure on inflation? How will the Los Angeles wildfires impact government spending?  How will the illegal immigrant deportation promises be funded? 

So for now, the outlook for bonds is pretty bleak and highly uncertain, which is usually a good time to buy.  In the short end of the bond market where InvestMint clients put money to work, the pricing out of interest cuts in 2025 provides an opportunity for higher returns as well as an excellent place to wait, watch and follow the lead of longer dated ETFs such as TLT.

The InvestMint Team

https://www.investmintapp.com/blog