Breaking News
Investing Pro 0
NEW! Get Actionable Insights with InvestingPro+ Try 7 Days Free

Short-Term Bonds Are Savior For Fixed-Income Strategies This Year

By James PicernoMarket OverviewAug 16, 2022 07:39AM ET
www.investing.com/analysis/shortterm-bonds-are-savior-for-fixedincome-strategies-this-year-200628571
Short-Term Bonds Are Savior For Fixed-Income Strategies This Year
By James Picerno   |  Aug 16, 2022 07:39AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
SHV
+0.03%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
JNK
+2.15%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
TLT
-0.28%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

The rout in bonds so far in 2022 has been deep and wide, with a notable exception: short maturities, which have provided valuable stability that’s otherwise in short supply.

Comparing the extremes for year-to-date results for a set of US bond ETFs tells a dramatic tale. The top performer through Monday’s close (Aug. 15): short Treasuries SHV, which is essentially flat this year. At the opposite end of performances for our opportunity set: long Treasuries (TLT), which have suffered a steep 21.2% haircut.

SHV Daily Chart
SHV Daily Chart

This year’s experience with fixed-income securities is a reminder that short maturities sometimes play a crucial role in preventing bond-market volatility from completely shredding a bond strategy that appeared prudent pre-2022.

US Bonds YTD Total Returns
US Bonds YTD Total Returns

The question is whether the worst of the bond-market pain has passed? The answer largely depends on three interactive factors: inflation, monetary policy and economic activity.

By some accounts, light is beginning to emerge in the inflation tunnel, or so last week’s modestly encouraging update on US consumer prices for July, which suggests that the recent surge in pricing pressure has peaked.

“Over a strikingly short interval, high-yield investors [have come] around to believing inflation is sufficiently under control that the Fed [will] not have to hike interest rates dramatically enough to trigger a deep recession,” says Marty Fridson, chief investment officer of Lehmann Livian Fridson Advisors “Time will tell whether they were correct in changing their views on that matter.”

Meanwhile, the recent bounce in JNK has been impressive. After bottoming in mid-June, the ETF is up nearly 9% as of yesterday’s close.

JNK Daily Chart
JNK Daily Chart

US bonds overall have recovered over the past two months, but deciding why is at once tricky and essential for deciding if there’s more room to run higher. For investment-grade bonds – Treasuries in particular – recession worries are a key source for lifting prices. If the US economy is destined to contract in the months ahead, as a growing chorus of economists predict, the safe-haven trade of owning government bonds will strengthen.

By contrast, ongoing inflation risk is a reason to dump bonds as the fixed-coupon payments become less valuable in a period generally rising prices and interest rates.

“Whether we are technically in a recession or not doesn’t change my analysis,” advises Minneapolis Fed President Neel Kashkari. “I’m focused on the inflation data,” which implies that the central bank needs to keep raising interest rates until inflation is tamed. Given the still-high level of inflation relative to the Fed’s inflation target, that line of analysis represents a headwind for bonds and so there’s reason to wonder if the recent rally in fixed income can continue.

It’s possible that the market will be in a wait-and-see holding pattern until economic and inflation data paints a clearer picture. Meantime, Fed funds futures continue to price in high odds for another hike at next month’s Sep. 21 FOMC meeting.

“The outcome of the next meeting remains up in the air, but the overall path the Fed expects to follow is clearly one of “higher for longer” policy rates,” writes Tim Duy, chief U.S. Economist at SGH Macro Advisors in a note to clients on Monday.

“That’s the story Fed speakers continue to uniformly lean into as they push back against the perception that the Fed will cut rates anytime soon. The sustainability of that rate path may become more evident if economic activity firms in the weeks ahead.”

Short-Term Bonds Are Savior For Fixed-Income Strategies This Year
 

Related Articles

Short-Term Bonds Are Savior For Fixed-Income Strategies This Year

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email