In Tuesday’s daily blog titled “Gold as a safe haven asset class” I showed the performance of gold during all the major recessions and market moving events since we left the gold standard in 1971. If you missed that one you can see it here:
Since our VTS Tactical Balanced Strategy (stocks, bonds, gold) moved into our safer IEF Bonds position recently I thought people may want to see a similar analysis of how bonds performed during those same periods. Now there’s a couple things we have to keep in mind here:
1) Bond ETFs haven’t been around nearly that long, so for this analysis I will be using the Vanguard Total Bond Market Index (VBMFX) which does include several types and duration of bonds. Our strategy uses IEF specifically because given where interest rates are at it’s best to shorten the duration of bonds we hold in anticipation of an eventual rate hikes.
2) The usual disclaimer that you often hear of: “Past performance is not necessarily indicative of future results”is especially true in the case of bonds. Remember bond funds rise in value as interest rates are remaining steady or falling, and vice versa. It’s essentially an inverse relationship. So take a look at interest rates on the US 10 year since 1980:
So we shouldn’t be overly surprised that it’s been a 35+ year bull market in bonds. Interest rates have just steadily declined in that period. Check out the performance of the Vanguard Total Bond Market Index (VBMFX)
That’s an impressive chart, and it’s important to note that it has actually continued to increase since the Fed dropped the funds rate effectively to zero at the beginning of 2009.
But we do need to keep in mind that rates remaining steady or declining is the ideal situation for bond funds, and that may not be the case going forward.
Given the Fed has already began raising rates albeit slowly, and they will also begin the daunting task of unwinding the 4.5 trillion dollar balance sheet very soon here, like I said past performance isn’t necessarily indicative of future results and nobody really knows where we’ll go from here.
But let’s check out the performance of the VBMFX during all the same periods. The data doesn’t go back further than 1986, but there’s still plenty to show:
The VBMFX has data for 3 of the 5 major NBER recessions since 1971 and you can see in all three cases it was rising through the downturns.
Again the performance during the extended S&P 500 drawdown periods has been impressive. The last chart I will show is to determine whether in the past bonds have been a short term flight to safety during major market moving events
Since bond funds are based on interest rates they aren’t as dynamic in the short run, so not surprisingly during scares that shocked the major stock markets, bond performance is much more subdued.
However, as a conservative investor I’ve always believed that not losing money is just as important, if not more important than making money and the VBMFX certainly did that through the turbulance
So clearly in the past, gold and bonds have been what we would call safe haven asset classes or flight to safety assets. The million dollar question though is:
Will that still remain the case going forward?
If I put on my shiny robe and peer into my crystal ball for a second, my guess is for gold the answer will be yes. I do have confidence that gold will play it’s part in curtailing losses during major corrections and recessions, and may even provide the VTS Tactical Balanced Strategy a source of profit during the turmoil.
For bonds through, my crystal ball is telling me… kind of. While I certainly don’t think bond performance will be very good going forward, I don’t think it’ll be an epic disaster either because I seriously doubt rates will rise very much in the next decade or so.
If they did go over about 4-5% that could cause some major problems for the larger economies of the world so my gut is telling me central banks will do everything in their power to make sure yields only rise a few percent.
But that does beg the question, should we even bother with our IEF Bonds positions going forward given this current rate environment?
For the immediate future, yes. But certainly to be continued…..
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