Bonds. Where to from here?
US Treasurys are on track for a second straight annual gain, but you’ll kindly recall that 2023 was a close call. Late last summer, a brutal long-end selloff put US debt on track for a third consecutive decline.
Had the losses held, it would’ve been the first time in the short history of the republic that 10-year US debt or its “ancient” equivalent delivered losses to investors for three years in succession. But they didn’t. 2023’s late-summer losses didn’t hold, and Treasurys ended the year with a furious rally. Bonds have performed reasonably well in 2024, and benchmark US yields are nearly 100bps off the YTD highs as we sit here today.
And yet, losses incurred in 2021 and, famously, in 2022, have Treasurys tracking for their weakest decade of returns in more than a century, as illustrated by the figure on the left, below.
Commodities, meanwhile, are attempting a comeback after what BofA’s Michael Hartnett described as “their worst decade since the 1930s.”
This harkens back to the “better 40” discussion. There’s an argument to be made that commodities are a better candidate for the non-equity portion of balanced portfolios in the post-pandemic / war era. I wouldn’t necessarily disagree, although as ever, there’s nuance that needs quibbling over.
As I put it two months ago,
I still doubt the most extreme versions of a macro-policy-geopolitical narrative I otherwise buy. It makes all the sense in the world to suggest we’ve entered a new era defined by rolling bouts of macro-policy shocks and that in this new era, bonds will exhibit more volatility than they did previously, or anyway won’t be the sort of docile creatures you can safely lever five times and sleep at night. That’s especially true given the supply realities associated with fiscal “excess,” and a shifting buyer base where price-sensitive investors are supplanting price-agnostic bidders. But to suggest, as some have, that bonds are now persona non grata, and should be replaced entirely with an allocation to raw materials, seems alarmist not to mention perilous.
That’s still my opinion, but it goes without saying that exactly nothing’s changed since August vis-à-vis the multi-faceted “new macro epoch” thesis that informs the bull case for raw materials. Nor, for that matter, has much changed regarding the structural bond bear case.
Indeed, the bear case for bonds is in many respects just the flip side of the bull case for commodities. They’re almost corollaries.
Hartnett underscored as much. The “big picture,” he reiterated in his latest, is comprised of “inflationary secular themes.” Those themes: big government, a shift in societal priorities from inequality to inclusion, a shift in the policy burden from monetary to fiscal, a shift in trade from globalization to isolationism and, of course, a shift in geopolitics from “peace to war.”
