Everyone Declared Bonds Dead. You Know What To Do

Adding another asset to the investor toolkit.

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Long-term U.S. government bonds have been a terrible investment over the last five years. The Federal Reserve pushed yields down aggressively during the COVID-19 pandemic panic, leading long-term U.S. government treasury bonds to hit a measly ~1.5% yield. Since then, performance has been ugly.

Let’s look at the 20+ Year Treasury Bond ETF (Ticker: TLT). Its price is now in a 50% drawdown from 2020. The yield is currently 4.4%. Adjusted for inflation, it is likely in a 70% drawdown. Ugly.

I have read many takes on the death of long-term bonds. The US government deficit is apparently unsustainable. Foreign holders are now afraid to buy them. New tariff-induced inflation risks will cause yields to rise further.

I believe now is a perfect time to buy TLT. Across my taxable and non-taxable accounts, the ETF is now 8.6% of my portfolio. It can act as a perfect ballast with a market increasingly looking early 2021-’ey.

Look, if the doomers are correct about the deficit, we have bigger fish to fry than our personal retirement accounts. These scenarios should not scare you when investing, because if it happens, none of us are safe. It is like worrying that the sun won’t rise tomorrow; we’ll all be dead anyway.

Here’s the rub. Inflation is down. The U.S. government cannot afford to finance its deficit at much higher yields and likely needs much lower yields to get its budget back in line. Housing affordability needs lower interest rates. Politicians want lower interest rates. AI may be a deflationary force + a huge boost to GDP.

Everyone wants lower interest rates!

Incentives across the board call for TLT yields to fall, and I think that will occur over the next five years. Or, they might hang around the same level as today.

Long-term bond yields are unlikely to rise significantly from here. They are likely to fall. Is it a guarantee? No, but I think it is a good bet. High upside potential with minimal downside is the best investing situation. TLT today fits that definition perfectly.

I do not believe TLT will outperform my core stock picks over the next 10 years. However, if the market crumbles for an extended period — something that can happen! even if it hasn’t happened recently — the Federal Reserve will cut rates and long-term bond yields will fall, driving the price of TLT up.

This will give me the flexibility to invest aggressively in cheap stocks. That is how you make the best investments and create life-changing wealth. A much more difficult proposition if your portfolio is going to be 100% correlated with a broad 50% drawdown in equities.

I am not selling stocks and going all in on cash/bonds. The vast majority of my portfolio remains in the same stocks I have been talking about for the last few years. It likely will be unless things get batshit insane and prices go parabolic.

But with the market ripping again, it is difficult to find attractive opportunities in stocks within my wheelhouse. TLT at $85 can be a fantastic place to put my capital, waiting for the fat pitch to reveal itself.

Stay patient. Don’t chase. Forget about the nonsense up 100%, 500%, or 1,000% in the last 12 months.

Eventually, the opportunities will reveal themselves.

-Brett