Bonds Are Still Saying Something...But Not What They Used To!

1.) YIELDS – I don’t make the rules of how markets respond to things. We just adjust as conditions change. The 2YR Yield had a big day Friday on Fed Chair Warsh’s more hawkish-toned speech at Jackson Hole. It doesn’t matter what he said, but how markets responded. And the 2YR responded by breaking out to a new high at 4.36%. It is below that this morning, so it is possible that it doesn’t hold. But the move is significant in that the 2YR yield tends to be the “Fed Front-Runner”… pointing toward what Fed policy might/could/should do. Some will look at this yield move and say a Fed rate INCREASE is all but done. After all, the 2YR Yield is now 0.71 basis points above the effective Fed Funds rate (EFFR). Right now, the 2YR Yield would need to break below 4.14% to move into a bearish or downward trend. Given Warsh’s recent comments, that doesn’t look likely. But, if you look at this through a different lens, you can see that it still remains unlikely that the Fed raises rates in September. Why? The bond market is doing the Fed’s job… rates have been moving higher in the bond market! So, while the yield flirts with a new high, some indicators suggest that the yield pulls back some from here. That big yellow arrow in the chart below is that indicator. Let’s also not forget that Warsh is a Trump appointee. Raising rates would likely bring the ire of President Trump. Most don’t care about that. I’m guessing Warsh does. It seems likely he just lets the market be the market. What’s the cure for high rates? High rates.

2.) BONDS – Simply put, they just “ain’t been doin’ their job!” Historically, stocks are where you go to make money. Bonds are supposed to be the boring part of the portfolio that keeps things from getting too crazy when stocks start misbehaving. The chart below compares different combinations of stocks and bonds during two very different periods: 1986–2020 in blue and 2021–2025 in red. The bottom of the chart measures risk via “standard deviation.” Sounds complicated, but it’s not. It’s just a measurement of how much your portfolio moves around. We call that volatility or “bumpiness.” The further left you are on the chart, the smoother the ride. The further right you go, the bumpier things get. It doesn’t mean that 10% risk gives you a 10% chance of losing money. It also doesn’t mean you can only lose 10%. It just tells us how much returns tend to swing around. The vertical axis shows returns…so higher is better. In building a portfolio, we’d ideally like to move up and to the left…more return, less bumpiness. And for the longest time, bonds helped to achieve that. Look at the blue line. From 1986 through 2020, a portfolio of 100% bonds produced roughly 7% annual returns with relatively low volatility. In that era, an investor could add stocks and increase returns without dramatically increasing risk. But that’s all changed. Many investors still maintain a 60/40 portfolio (60% stocks/40% bonds) in hopes of replicating that older era of returns versus volatility. But 60/40 is really just 100! The red line is from 2021 through 2025, and it’s totally different. During this period, a portfolio of 100% bonds actually lost money while still experiencing plenty of volatility! The historically “safe” part of the portfolio wasn’t just producing lousy returns. It was bouncing around while losing money. During this time, bonds still reduced some of the bumpiness. But investors were giving up a whole lot more return to get it. Why? Inflation. The bottom line is that rising rates are problematic for bonds, far more than rising rates are for stocks. That’s not to say stocks can’t have problems in a rising rate environment. They can. But the stock market looks to the acceleration or deceleration of both growth AND inflation. Rising rates are the bond market’s way of saying we’re not seeing a recession. We’re not seeing an environment where the Fed cuts rates. Yet investors often view that as a huge negative. Be careful what you wish for. Rates that are getting cut signal that something is weak in the economic structure. And right now, we’re not getting that message from the bond market. But that’s also making it hard to own too big of an allocation of bonds.

3.) BITCOIN – Coinbase is the world's largest crypto exchange. They have something called the Bitcoin Premium Index. That Coinbase Premium turned positive, indicating bullish U.S. institutional sentiment. Does that mean Bitcoin is ready to go straight up from here? Probably not, but we are now in the 4-year cycle “window of accumulation.” That just means that now through about November has historically been a good time to buy the asset. Will that cycle repeat like it has in the past? No one knows, but that cycle has been incredibly consistent throughout Bitcoin’s fairly young life. Bitcoin is currently signaling overbought within a newer bullish (upward bias) trend. This just means that it would not be surprising to see it test the $70,000 range while the overbought condition washes out over the next month or so. Would Bitcoin be a good buy in that $60,000 to $70,000 range? Most likely, yes.