Road sign to bond market

My goal today is to give you some remedies for the plummeting bond values from which most of you reading this are suffering. One oft distributed piece of radio wisdom these days is that, in retirement, it’s all about income. I respectfully disagree and contend that it should be about total return. Particularly enough total return to keep up with inflation during 20 or 30 or more years of not working for income.

During more normal economic periods—certainly not our experience lately—income-distributing bonds and other forms of debt (remember Certificates of Deposit?) are prized for general safety by investors. Unless a borrowing company or government goes broke, and if the rate of inflation remains low, the holder receiving steady income will be rewarded. In more normal cycles, holding bonds will even provide a balance to falling stock prices.

But a small minority of economists and observers (including me) have consistently criticized the professional class of Ph.D economists in general and those of the Federal Reserve in particular for their newfangled theory of saving everyone but the lending public by the ZIRP, Zero Interest Rate Policy. Like the decades old margarine commercial paraphrased, it is not nice to fool Mother Fundamental Economics!

Not only were you sucked into lending money (buying bonds and hoarding cash in banks) in the past 13 years at very low interest rates, but now those yields are totally inadequate to help you pay for leaping prices of food, fuel, rent, and other inconvenient necessities. Oh, and did I mention that your money originally loaned has a market price of perhaps 90 cents on the dollar.

What about long dated Treasury Bonds? Are they the safest? For an example, I am using the iShares Barclays 20+ Year Treasury Bond Fund, symbol TLT. In March, 2020, it indeed served as a balance to the plunging stock prices when Covid-19 took us in its grips.

But from a high point of $179.70, the closing fund price last Friday was $113.67, a drop of $66 or 36 percent. In the same period, the price per share of American Funds The Bond Fund of America has dropped about 4.74 percent. And the yields on either one have not been even 4 percent per year according to

I am not picking on American Funds. It and all other managers are going to do the best they can. But the bearish bond market that began in 1946 lasted until interest rates reached a peak in 1981, a pretty long time for anyone to suffer a decline in purchasing power from investments. What if this time, it is only for a decade? I feel certain that someone in that Ph.D economics group would be willing to tell us they know for sure.

I have already discussed in these pages that stocks and commodities usually fare better in inflationary times, but that does not solve the problem going forward for you who want to hold your bonds or to lend more money as interest rates do rise as the Fed now promises.

Instead, you or your advisor should consider adding a position to your portfolio that rises as new interest rates also rise. One I have been using is the Direxion Daily 20 Year Bear 3X Shares, symbol TMV. How does it work? Since its inception in 2009 through even yesterday morning, it lost 97 percent of its initial value. This is only right because it is inverse or opposite of long bonds like TLT above.

Since January 1 of this year however, TMV has gained 87 percent in value, more than enough to make up for the value of your lost bond values (if you buy the right amount of it to offset your particular income holdings). It is a scalpel however, and can travel a long direction up and down almost every day. You know there are no guarantees in investing.

However, Fed Chair Powell has promised that it will raise rates until inflation is reduced to some lower figure. But until interest rates stop rising or signal that they will, TMV should rise in value as well. (By the way, there are other funds inverse to bonds that carry no leverage and are thus not nearly as volatile). It will just take more of those products to offset your income holdings.