Tag Archives: Interest Rate Risk

February Commentary

In February, our net weighted average return in was +2.67%. Our net average return for the month by strategy:

  • Conservative: +0.54%;
  • Balanced: +2.53%
  • Growth: +4.34%.

Since 2015, we have generated a net weighted average return of +61.10%.

In last month’s commentary we spoke about how an increase in vaccinations, economic reflation and fiscal spending by major economies are having a positive impact on markets. These trends continued to gather strength in February. Although there is still trepidation about current and future virus mutations, countries that have been leaders in vaccination numbers are showing lower transmission rates and lower fatalities. These are very good things for the continued global recovery.

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OUR 2020 RESULTS

Our net weighted average return in 2020 was +18.23%. Since 2015, we have generated a net weighted average return of +54.39%.

2020 was a challenging year. We were forced to navigate an all-out panic in financial markets while weighing the staggering human costs of the Covid-19 pandemic. Shortly after what turned out to be the market lows of the year in March we wrote the following:

“The most significant reasons as to why markets have rebounded are 1) the massive rescue package passed by the US Congress, and 2) the massive balance sheet expansion by the Federal Reserve. The amount of money with which the richest country in the world is ready to attack this crisis is without comparison in the history of the world. And what you learn in capital markets is that you don’t fight against the guys that make the bullets.”

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Bond ETFs – Winter is Coming

Over the past 35 years, the Barclays Aggregate Bond Index has returned on average 7.8% per year. Those are equity-like returns with considerably lower volatility.

In 1981, the yield on 10 year US Treasuries was just shy of 16%, they now yield below 2%:

US Treasuries

That’s one helluva run.

That being said, this type of move in the bond market will not be repeated over the next 35 years. So why are we behaving like it will?

If you buy a bond and hold it to maturity, you know that your returns will be your yield-to-maturity (barring default, etc…). Even in the current low yield environment, you can buy a 10 year US Treasury note and know that if you hold it to maturity 10 years from now, your average yearly return will be 1.87%.

However, this is not the case with bond mutual funds or ETFs.

As the US Fed resumes its rate hiking cycle, retail investors everywhere are going start to understand a concept that they could pretty much ignore over the past number of years: interest rate risk. Practically speaking this will take the form of bond portfolios losing their value as rates rise and bond prices fall.

If you own individual bonds, rising rates mean that you incur the opportunity cost of holding paper that has maximum upside. However, if you own a bond ETF, especially one with long duration, the value of your holdings can fall considerably.

Here’s a good run down from Forbes:

LINK: Bond ETFs

Do we hold bond funds in our portfolios? Yes, we do. But we also have exposure to the assets that will have to rise in order for the Fed to continue to raise rates – especially in conservative portfolios.
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