Bonds… The Rough Stretch Continues:  The Bloomberg US Aggregate Index continues the largest drawdown in its history. Since August 6th, 2020 – the end of the most recent bull market in bonds – the index has declined by -9.2%. Even after the drawdown, which was caused by a rise in interest rates, the AGG still only offers a 2.25% yield.


*  Fed Minutes update: The week started off with an interview from Lael Brainard, who is considered a policy dove, where she spooked the market with her surprise support for not only a 50-bps hike in May, but also comments on the need for rapid balance sheet reduction – we believe that this was not something priced into the market. Brainard went on to say inflation is far too high with risks to the upside and she expects the combination of rate hikes and QT will move monetary policy close to neutral by the end of the year. To follow that, the FOMC minutes were delivered on Wednesday and while they weren’t a big hawkish surprise, they were overall hawkish, and they reaffirmed (again) that the Fed is serious about breaking inflation. During the last bout of QT (2017-2019) the process was relatively calm and methodical, but recent Fed commentary suggests we can toss that playbook out the window – a more Volckerish-tone. Even with the noise, the S&P 500 is only ~6% off its all-time highs despite a tightening cycle that looks to be the most hawkish we’ve seen in decades, given 40-year high inflation.


 *  Well Yields Have Risen, Is It Time to Buy Bonds… Updated?! Even after the sell off, we still think stocks are more attractive than bonds. Bonds in our mind have two points in a portfolio: stability & income. Given the inflationary backdrop (remember bonds are fixed cash flow assets) bonds won’t serve as the portfolio hedge most investors expect. On top of that, the income provided by bonds is still historically low. In our opinion, traditional bonds, given their record-high duration, are uninvestable until their nominal rates are > inflation, i.e., real rates are positive.


*  Mortgage Rates Make Pre-Covid Highs

Mortgage rates are rising drastically as long-term Treasury rates have climbed to start ’22 making higher borrowing rates and monthly payments more expensive. For every 100bps move in mortgage rates, that requires a 10% adjustment in home prices to keep payments unchanged. This rise in mortgage rates comes in the face of 36 straight months of rising US home prices. Prices have increased by 19% over the last year and doubled over the last 10 years.


*All Data and Charts Sourced from Bloomberg LP. As of 3/24/22.




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