Last week the Wall Street Journal published an article advocating that it is time for investors to buy bonds. This type of market timing is never as easy as it sounds, but given the woeful 2022 performance (Treasuries are down 16% since last January inclusive of reinvested coupons) it is easy to imagine value investors looking for a reversion to the mean. That said, knowing what we know about economic data and the Federal Reserve’s mandate to fight inflation, the waters are still quite muddy. The market has to balance the stability of coupons vs the scourge of inflation and timing this perfectly is a near impossible game.
Every day there seems to be another high in the 10-year Treasury yield and prices get lower by the minute. The truth is, no one knows exactly how the next few months are going to play out, but as a private equity company, we’ve been hyper focused on the traditional 60/40 Equity/Bond portfolio as of late as we ultimately believe that holding private investments (Equity or Real Estate) can help improve the Sharpe Ratios of these portfolios.
Given the choice, we do think that bond valuation and risk profile are currently more attractive. Bonds are cheaper even if they’re not yet “cheap”. That said, hedge fund giant AQR is looking at the same data and suggesting the opposite as history would suggest that stocks and bonds are highly correlated during periods of inflationary shock. They may be right, but predicting where inflation goes from here is a very difficult task. Public market valuations change in the blink of an eye, and we still prefer private markets for their better risk and reward characteristics.