I have been in the investing business long enough to look at today's fixed-income landscape and see an absolute gift. After more than a decade of being starved for yield by the Federal Reserve, the bond market is finally offering us a clean, honest 5% return on zero-risk U.S. government debt.
That chart above shows the history of the U.S. 10-Year Treasury bond ($TNX), all the way back to my rookie year in the business (1986). Frankly, the investing world and the world in general were so different back then. The stock market hadn't yet crashed 22% in a single day (1987), Japan was barely beyond "emerging market" status, and the New York Mets were really good.
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Still I did not appreciate just how good bond investors had it back then. They didn't either, since rates had been in the 10% range or higher for a while, following the 1970s, a decade in which rates peaked in the high teens.
The difference today: I suspect stock market returns are in the process of peaking in that same 15%+ annualized range right now.
I frankly had no idea bonds touched 10% early in my career. But inflation was high to match, so I assume that it was just par for the course.
My attraction to bonds, when the 10-year is at 4.5% and the longest bonds are around 5% or so, is not so much about the real return. I do not know if inflation will kick much higher. In fact, that chart above provides at least a hint that if we see 5% on the 10-year, we could be opening the door to much higher rates.
But let's take things one step at a time here. Because as I see it, I have bond rates exactly where I want them. The current macro setup gives us a beautifully defined win-win-win scenario if you deploy the right tools.
You can lock in a baseline 5% yield, maintain a tactical hedge to protect you if inflation forces interest rates even higher, or position yourself for a massive capital gains windfall if the economy suddenly cracks and interest rates dive. And to me, my bond ladder (of zero-coupon U.S. Treasuries) is simply a base layer on a portfolio that includes ETFs and trading accounts.
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