Bonds at all time highs, does it matter?

As you may be reading or watching on the news, we are starting to see some cracks in the armor of this market, more on this later.

Most importantly rather than focusing on all the negativity and stories surrounding the markets today along with all the political garbage going on I wanted to point out some actual news that should be making us take action or at the least getting a game plan together.

Bonds are at all time highs and don't really have much room to go up as the 10 years is sitting at sub 1.5%, couple this with markets being just under their all time highs! See above...

As you can see the yellow line above shows a path that would take the 10 yr to 0% which has very low probability of happening. If this were to be the case your bond would increase roughly 4-5% and would yield 0%. Most studies show your projected rate of return on your core risk free bonds at the moment is the yield it currently is earning. So look to earn 1.5% on your bonds over the next few years which puts real returns into the negative.

So what does this mean, we have a defined risk asset and a high probability outcome ahead of us. In some views it's worry and fear that dominate the conversation. In my eyes it's opportunity, here are some of the outcomes that stem from this situation:

• Don't rely on bonds for income in the near future. Government has no choice but to keep rates low.
• If rates do increase your yield will increase but your looking at over 10-15% downside risk on the principal.
• Putting protection on your portfolio and risk assets is cheap. Low volatility and stock highs along with low rates.
• Lending and leverage is cheap which allows some investment opportunity. 
• The points above make alternative income and fixed accounts attractive and should spur a tactical opportunistic re-balancing that will allow for you to take advantage of the current opportunity. 

As for the market, yes this signals some flight to safety and may be start of something larger but if you are in good position tactically just be aware of the idea that a small sell off could become larger and be ready. Don't try to predict just have a game plan on what you would do if stocks went down over 10%. It's not about predicting more than it is about knowing your plan when and if something does change.

I'll assume most of us have more to do than worry about the market like, creating strategic allocation, Core allocation minimums and planning around what is actually happening NOW...Bonds are at all time highs and it's an opportunity!

PS Go talk to your bankers and mortgage reps to see if you can't lower some of your rates on debt!

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