Stock market news gets reported every day on the mainstream media and usually gets a headline when new all-time highs or big losses occur. Bonds, on the other hand, rarely get a headline. The current environment, however, has prompted some notice!
Just when you thought the bond market couldn’t get any stronger, bonds are quietly hitting new all-time highs. As reported in a Bloomberg article last night (https://www.bloomberg.com/news/articles/2020-02-20/vanishing-spreads-are-ringing-alarm-bells-in-risky-debt-markets), many types of bonds including U.S. investment grade and high yield debt continue to trend higher with strong bond returns. As reported in the article, U.S. investment grade corporate bond yields set a new all-time low of 2.56% with 10-year treasury yields bottoming at 1.49% overnight.
Some of the most popular bond ETFs are putting up strong year-to-date returns. The iShares Investment Grade Corporate Bond ETF (LQD) is up 3.02% and the Schwab U.S. Aggregate Bond ETF (SCHZ) is up 2.21% so far in 2020. This is against a backdrop of strong, yet volatile, equity returns where the S&P 500 (IVV) is up 4.72% YTD.
The strong bond market so far in 2020 follows a surprisingly strong bond market in 2019 where U.S. investment grade bonds (LQD) were up an astounding 17.4% and the broader core bond category (SCHZ) was up 8.6%.
Though behavioral biases may lead many investors to shy away from investing at the perceived “top” in this market, a long-term strategic investor should not make market calls. However, there are some strong fundamentals currently supporting a continuance of a low rate environment including the strong and rallying dollar, modest and stable U.S. growth with low inflation countered by tepid global growth, as well as external factors like the coronavirus. Alternatively, there seems to be a less convincing case for rates to rise per an accelerating global economy and inflation that seems less likely in the near term.
Long-term strategic portfolios that are broadly diversified to include a broad mix of stocks and bonds of different types and managed to the appropriate risk target to achieve goals will be rewarded over time.