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Fears of rising interest rates have become background radiation, exposing everyone. A recent Eaton Vance survey of 1,006 advisors concluded that, “nearly three-quarters of advisors report at least some concern about a near-term increase in rates, and one in five say they are very concerned.”
The distress runs so deep that some advisors call for completely abandoning bonds. At a recent investment conference in Manhattan, I witnessed a senior executive of a major real estate syndicator tell 1,000 advisors that he believes that investors should hold 0% of their portfolios in bonds. “I don’t see why they should hold any bonds,” he chirped to applause and laughter when answering a question of what percentages investors should hold in various assets. What should investors buy instead? REITs of course, he said. I won’t tell you which real estate syndicator he represents, but its underlying stock value is down 97% since that speech.
David Einhorn’s Greenlight had a strong fourth quarter; Gains on Neubase Therapeutics [Q4 Letter]
David Einhorn's Greenlight Capital was up 5.2% in 2020, underperforming the S&P 500's 18.4% return. For the fourth quarter, the fund was up 25%, which was its best quarterly result ever. Longs contributed 42% during the fourth quarter, while shorts detracted 15% and macro detracted 1%. Q4 2020 hedge fund letters, conferences and more Growth Read More
Later, in Denver, at an alternative investing conference sponsored by Financial Advisor magazine, the audience survived similar fusillades against bonds.
Even the venerable Barron’s ran a cover story with the warning “Trouble Ahead for Bond Funds.” The pull quote from the article read: “There is a real, real risk in bond funds.” In Advisor Perspectives, I read with surprise an article titled “Why Bond Funds Don’t Belong in Retirement Portfolios.”
Here is the investment-conference formula. The speaker directs the audience, “Raise your hand if you’ve survived a bear market in bonds.” The audience looks around bewildered; after all, the last bond bear market ended over 30 years ago. No one raises a hand. “Proof,” he booms, “this is what I am talking about folks – you have no idea what to expect in a bear market. Be warned, it’s not pretty.” Then he offers up as evidence investing your entire IRA in a 30-year Treasury bond the day before interest rates shoot up 4%. “In a flash 48% of your net worth instantly vanishes, forever–in a U.S. Treasury Bond! Do I have your attention yet?” The audience shrinks in horror.
My research challenges these hysterics. Rising interest rates are nothing to fear. Total returns will bepositive, not negative, if we have a similar rate trajectory that we had in the last bear market in bonds. Bonds should continue to be a staple in investors’ portfolios – and in greater, not lesser percentages as our population ages and interest rates increase.
Additionally, Blackrock found that from 1929-2014 stocks were negative in 24 years. In 92% of those years, bond returns were positive.
The last secular bear market in bonds lasted from roughly 1950 to 1982. Let’s start with a picture – Figure 1. This is what a bear market in bonds looks like. A 5.58% average annual return for 32 years.
Figure 1 – Thomson US: Corp – High Yield – MF Index, 12/31/49-12/31/81, Hypothetical $10,000 investment.