Duration, Fixed Income vs S&P Yield

September was a long time ago, like yesterday!  I pounded the table flat!  Meaning I wrote here about Duration.  If Interest rates were to rise, those who were looking for safety (i.e. yield) were taking massive risk

This week’s bond rout, eclipsing the prior smashing in January 2009, has destroyed more than $1 trillion of global wealth. The four-day schmeissing of bond prices has produced the largest loss of bond values in two decades.

It mattered not who you voted for or your party affiliation, if you were long bonds (anything fixed income) your ship took direct a hit!  More blows like that and it’ll be game over ‘Battleship’ style.

The following table shows the effects of last week, yield on the benchmark ‘risk free’ 10 Year Treasury spike and joined the ‘risk on’ yield.

sp-div-yield-v-10yr

What are the $ million question(s)?  Asking the RIGHT questions is germane to landing on (or in) the GREEN… golf AND financial puns intended!

  • Do interest rates rise (long or short end)?
  • Do indices rise or fall with rising rates?  Are there sector winners / losers?
  • Inflation goes higher or has deflation been forgotten?

Keeping the list short otherwise I’ll go on too long, rates are low everywhere.  The elasticity between US and other sovereign debt is stretched.  USD strength will test emerging markets dollar denominated debt and commodity exporters, US export competitiveness, and GDP growth.

I found this week’s earnings call with Bruce Flatt, CEO of BAM, directly on point (all of them):  snippets and edits for readability are mine

we strongly believe that we’re still going to be in a relatively low interest rate environment for this business cycle

So while we believe that both the short and long rates will rise under this administration, maybe even a little more and faster than was previously [expected]…  we do believe that long rates will stay [low]

the world continues to deleverage from an excessive credit that built up over the last number of decades and as a result, the disinflationary pressures persist and the global economic activity remains below trend.

what remains clear is that this dynamic has created and continues to create unprecedented environment for investment in real assets

Calling all Investors, Traders, folks with 401k’s, whatever.  Invest wisely.  Traditional Bond (fixed income) and / or equity (large cap, sector diversified) portfolios will NOT produce traditional risk on or risk off returns.  Including non-traditional allocations to real assets, managed futures, and hedges are crucial to achieve positive results.