Bonds

You probably know that I don't see much value in bonds right now.  It appears that Warren Buffett shares my views {or I'll defer to age and billions of dollars in the bank and say that I share his thoughts on these}, calling bonds among the most dangerous of assets regarding inflation.   I get to the same point he does but perhaps in a different way by simply saying that if I can buy a 10 year US Treasury for almost the same yield that I can get on the S&P 500 which also has the potential to grow over the next 10 years, then why would I want to own bonds. 

I found this article today on bond math via a posting over at Abnormalreturns.com that might illustrate this even more.

The author of Econompicdata calls projected five year bond returns in the 4.5%-6% range "wishful thinking."  Here's their logic:

"The chart {above} shows that yield to maturity is awfully accurate in predicting five year forward returns for the aggregate bond index (this is because 5 years is roughly the universe of US bonds' duration). The unfortunate part is the current yield to maturity is a measly 2.06% as of yesterday's} close.

What does this mean?  It means that investors should not expect more than 2% annualized from your bond allocation over the next five years, UNLESS you are willing to reach for yield via lower quality credit, non-US exposure, or increased duration. It also means that if you have a 60% equity / 40% bond allocation, to reach an 8% all-in annualized return your equity allocation needs to return roughly 12% / year over the next 5 years. In addition, it likely means that correlation between bonds and equities are likely to increase over this time frame during times of turmoil, as bonds don't have room to appreciate in a flight to quality (more on that here).  In other words... don't expect much help from bonds..."

Link:  Econompicdata: Some More Ugly Bond Math

 

*Long ETFs related to the S&P 500 in client and personal accounts.