VTS Community,

With the stock market consistently making new all time highs, naturally there’s a lot of focus and excitement directed there.  However something that in my opinion has been surprisingly underreported is that bond yields are rising even faster.

The US 2 year has breached 2%:


Now I’m not much of a social media kind of guy but I have been making more of an effort recently to be more active on Twitter.  If you want to follow me you can do that here.

On Twitter it’s been quite surprising to me the resistance people put up to the idea that bond prices may start to matter with respect to stock market valuations.  So many people just saying trade the market, trade price, forget about bonds, it doesn’t matter etc.  It really is a bull market both in price and attitude.

But that’s a traders mentality.  I understand that bond prices may not matter to someone who day trades ES futures, but it seems to me this is missing the fact that the vast majority of investment capital in these global markets is buy and hold money.  It’s longer term investors, institutions, pension funds etc that make up the bulk of the capital.  Active traders are a small part of that.

How could bond yields not matter?  The global debt markets are much larger than the global stock markets.


Now this doesn’t matter as much to our investing because I do look at the markets with fresh eyes every single day and make trade decisions that aren’t valid past one single day.  But I do think it would be highly irresponsible if I was writing articles and tweeting about how bonds don’t matter.  They do.  They really do, and I would argue they matter more than anything else.  The reason for that is actually pretty simple.

When long term investors are making allocation decisions, historically bonds are safer than stocks so they are the ideal asset to form the bulk of a portfolio.  However when rates are painfully low like they have been in the last 9 years since the financial crisis and ZIRP  (zero interest rate policy)  that will naturally push investors toward stocks.

Especially in the case of institutions and pensions etc where the future viability of their models often depend on getting a certain rate of return.  The stock market would be the only game in town.  They may not want to overweight stocks, but I suppose they weigh that against the potential risk of a shortfall later on.

As interest rates creep up though, some of that money that was forced into stocks because it’s the only game in town might start moving back into bonds.  Everyone will be different and there is no specific bond yield number that will trigger this rotation, it’s mainly just a sliding scale.  The more attractive bond yields get, the less capital will be available for equity market investments.


Again for us, the VTS community, we will make today’s trade decisions based on today’s market metrics.  In my opinion this is the best way to invest.  Direct quantifiable decisions in the moment.  It doesn’t guarantee success and we do have bad months and the occasional bad year, but our probability of success is maximized and we have a much better chance of outperforming in the long-run.

But is it realistic to expect institutions and pension funds to do the same thing?  Move their tens and hundreds of millions of dollars around on a daily basis?  No of course not.  Their decisions will be much longer term.  That’s why bond yields matter and should be a major component in any stock market valuation model.  I for one will continue to track them with great interest.


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