Do bonds have a place anymore in your portfolio in the new Federal Reserve paradigm?
The Fed has a long history of creating asset bubbles, then later – sometimes years later – letting the air out of the balloon through monetary policy or regulatory change, leaving investors licking their wounds.
The most recent and most dramatic bubble inflation and subsequent deflation, of course, occurred in the first decade of this millennium. Through a policy of low-interest rates, the Fed largely encouraged American consumers to borrow heavily against their homes, while its laissez-faire regulation of the banks it’s supposed to monitor allowed these same consumers to borrow whether or not they had the wherewithal to pay the loans back.
We all know what happened when the Fed suddenly reversed course and raised interest rates and, perhaps more importantly, required banks to make their customers actually prove that they were good credit risks (imagine that?). We’re still feeling the fallout more than 10 years later, as millions of people defaulted on their loans because they couldn’t borrow any more money.
Now we have a similar story, only with stocks and bonds, but the Fed has taken a different attitude. It’s showing no inclination to prick the bubble it has created in financial assets through historically low-interest rates for a historically long period of time and through quantitative easing, i.e., attempting to corner the market on U.S. Treasury and mortgage-backed securities basically.
Yields on long-term government securities are now at their all-time lows, mortgage rates are at or near their all-time lows, while stocks are near their all-time highs even after this week’s coronavirus-inspired panic selloff. Yet the Fed has not responded as it has in the past, by letting some air out of the bubble, Continue reading "Are Bonds Still Relevant?"
