Treasuries pop. Will it last?
Portfolio strategy benchmarks continue to sink
US bonds had a good week. Is this the start of a rebound? There’s ample room for debate. We’ll get into that shortly. Meantime, US Treasuries topped the winner’s list for our global 16-fund opportunity set. The rally came in handy for offsetting the losses that swept over nearly every other slice of world markets. For details on the metrics in the table below, see this summary.
The iShares 7-10 Year Treasury Bond ETF (IEF) rallied 1.5% this week through today’s close (May 13). The fund has enjoyed a few weekly increases lately, although such events have been rare in recent months. That makes this week’s relatively hefty 1.5% all the sweeter. But don’t celebrate yet — it’s not obvious that IEF’s bearish trend has run out of road.
Let’s remember that the sources of this year’s rout in bonds are still here, namely: a commitment by the Federal Reserve to raise interest rates and high inflation. Although the Fed has raised rates twice this year, another 50-basis-point rate hike is estimated at a 90% probability for the upcoming June 15 FOMC meeting, based on Fed funds futures.
Yet the crowd is starting to consider the possibility that the worst may have passed for the bond market. Several reasons animate this view, starting with the latest reversal in the 10-year yield. After rising above 3% last week for the first time since late-2018, the benchmark rate wasn’t able to hold above 3% and ended today at 2.93%.
There’s always more consideration for thinking that US inflation has peaked. Earlier this week the Labor Dept. reported that the year-over-year change for consumer prices eased to 8.3% — the first softer annual increase since last August. Yes, inflation’s still high and will likely keep the Fed on a tightening path for the near term, but it’s a bit easier to wonder if the surge has ended.
There’s also concern that the US economy faces stronger headwinds for the rest of the year, perhaps leading to a new recession at some point in late-2022 or early 2023. Although the economic expansion still appears solid, based on published data to date, recession anxiety is trending up and so the the allure of Treasuries (which would likely fare well if the economy contracts) is in focus anew.
The assumption here is that the Fed’s plans to raise rates will soon become untenable if the economy slows enough, in which case the central bank would probably end its rate hikes and perhaps start cutting soon after, depending on how fast growth fades. Yes, it’s all speculative at this point, but for the moment it’s enough to inspire a bounce in bonds. Let’s see if there’s more traction for this narrative next week.
Meantime, most of the funds on our opportunity set lost ground again last week. That includes US stocks (VTI), a broad portfolio of US shares that slumped 2.5% — the sixth straight weekly decline. The slide would have been considerably deeper if it wasn’t for Friday’s sharp rally. Nonetheless, the trend for VTI remains conspicuously bearish. The selling may have gone too far too fast, which suggests a bounce is likely, but it’s still premature to argue that a sustained rally in American shares is set to launch.
Losses continue to weigh on portfolio strategy benchmarks. Another week of across-the-board losses, offering a reminder that globally diversified strategies remain on the defensive.
For the year to date, everything is in the red and the toll is now weighing on the trailing one-year window, except for the equal-weighted mix of global stocks, bond, commodities and property. But the downside bias is severe in all cases. The not-so-subtle implication: the losses for these passively run strategy benchmarks will roll on. ■