Tina Has Taken a Leave of Absence
October 28, 2022
In a challenging 2022 for markets, we’re starting to see more opportunities emerging in the bond market (specifically in US treasuries). In recent years, the outlook for investments in bond markets has been poor as government bonds yields have been historically low alongside of low interest rates. When bond yields and interest rates are close to zero, income earned on bonds is low and the potential for future capital gains is unattractive.
In recent years, a flight of capital from bonds drove investors into the stock market in the pursuit of a higher return on their investments and brought the phrase ‘TINA” (There Is No Alternative) into the investment world. As assets have flowed into equities in recent years, TINA was one of the driving forces behind the prolonged bull market in stocks beginning in 2009. TINA was also driving higher prices for speculative assets like bitcoin in the now gone era of zero interest rates.
US treasury bonds have become more attractive
This year, The Federal Reserve has raised interest rates aggressively in their bid to tame inflation. As a result, yields on government bonds are significantly higher and their investment prospects have become more attractive. When the yield on bonds goes up, investors earn both higher income and have higher potential capital returns in the future (because bond prices go up when interest rates are cut). TINA has taken a leave of absence and the bond market is better for it. The chart below shows the rapid spike in the US 3-month treasury yield over a ten-year period.
We have started to take advantage of this in our portfolio
We are introducing a three-month US treasury into our portfolio with an annual yield of 4.1%. This is significantly above the interest paid on cash accounts (many are below 1%, and according to Bankrate the average interest rate for savings accounts is 0.16% as of October 27).
We don’t know for sure what the future holds and the 3-month term on the treasury we bought gives us the flexibility to reassess the most productive use of capital when the term of the bond is up. For example, if the data is supportive and equities become more attractive over the next three months, we will be able to redeploy capital selectively to benefit from recovery upside (we anticipate there will be significant opportunity in select equities in the medium term). Now that bond yields are reasonable, we may also decide to increase exposure to US treasuries if the outlook for riskier assets deteriorates. As always at the portfolio level, we are invested in high quality companies trading at what we view as attractive valuations. Our portfolio is defensively positioned with equity hedges in place and a healthy allocation to alternatives.
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