The Upside for Core-only Bond Strategies May be Limited
Over the last couple of decades, buying and holding core bonds hasn’t been a bad strategy as interest rates have generally been declining, resulting in a long-term bull market for bonds. However, this year US Treasury yields appear to have broken out of their long-term downtrend line.
We are not suggesting that core bonds will never again be in favor again. Undoubtedly we will again find ourselves in a period when interest rates decline; representing an advantageous time for investors be in long duration (20 year+) bonds. However, Fed Chair Powell’s stance that negative interest rates, (which until now were somewhat common in some European countries) are not appropriate for the United States; probability suggests this may put an upper limit on capital appreciation in core US bonds.
In view of the potential for heightened volatility in the near term, coupled witth the structural challenges for the core bond market, investors may be well-served with a tactical approach for managing their fixed income allocation which would expand the universes to both core bonds, as well as non-core segments of the market like high yield bonds and convertibles. These relative strength-based models aim to identify trends in the market and allocate towards areas of strength whether it resides within or outside of the core. To learn more we would be happy to to discuss A managed tactical fixed income strategy, which is also available.