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KEY Topics: Game on for Bonds

KEY Topics: Game on for Bonds

April 27, 2023

Welcome to the first edition of KEY Topics. This series of videos and content will allow us to dive deep into single topics that I get a lot of questions about. I hope you find these shorter format videos educational and helpful to your financial journey.

I have been on TV lately talking about our bond strategy and why it works in this macroeconomic environment. So naturally, I received many questions, and our first topic is the KEY Advisors' long-term treasuries strategy.


Bonds are often overlooked, but they can be a great tool that can help grow and protect your wealth. The quick insight is that we are not using bonds in our portfolio for their yield, which is likely the same as a decent savings account today. This is why analysts are always talking about stock/equities when you watch financial TV networks. Quite frankly, bonds are boring. However, we are investing in bonds via ETFs. Our play is on the appreciation of long-term treasuries and their related ETFs. So, we are trading it like equities, buying the dips, and selling the rips.

Interest rates have a significant impact on long-term bonds. As interest rates rise, the value of existing bonds decreases because investors can earn a higher return on their money elsewhere. On the other hand, when interest rates fall, the value of existing bonds increases because they offer a higher return than newly issued bonds. This relationship between interest rates and long-term bonds is essential for investors to understand when making investment decisions.

Last year, we saw the most rapid increase in interest rates in modern history, and bond prices and their related ETFs took a beating. As a result, some ETFs lost up to 30% of their value, which is an excellent time to buy in because the Federal Reserve will likely stop rate increases in the coming months. As interest rates stabilize, bond prices will increase, and the ETFs will probably regain losses and net our clients a decent profit in an essentially flat equities market that is likely to become more volatile.


The last two interest rate hikes, look at the velocity difference between the two: 


Top three long-term treasury ETFs over the last 12 months. none of them are in positive territory:


By comparison to the interest rate increase over the same time period:  


Now, both the Bulls and Bears agree that the Federal Reserve is almost done raising rates. Where the opinion differs is whether or not a stop in the rate hikes will save the day. The Bulls believe it will and that we'll avoid a recession. The Bears, like myself, think the damage is already done. Unfortunately, we'll likely experience rough waters ahead as the economy has yet to feel the full impact of the rate hikes, increased cost of capital, and unresolved debt ceiling debate.

However, it is our opinion that our bet on bonds is a win-win. Whatever scenario is correct, investing in an asset class that lost significant value last year will gain value this year. The Bull scenario will net small profits, while the Bear scenario will net more significant profits. What about the debt ceiling debate? How will this impact our strategy? It won't because the last time the markets reacted to the debt ceiling debacle in 2011, it affected the short end of the curve (short-term bonds), not the long end of the curve (long-term bonds).

We believe our Bullish bond strategy works in this Bearish macroeconomic environment, proving you can be both a Bull and Bear.

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