April 18, 2025 • 21 mins
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Steve and Clem examine how bonds have shifted from reliable safe havens to potentially risky investments in today's economic landscape, challenging conventional wisdom about treasuries as risk-free assets.
• Bonds traditionally provided safety and income, but inflation and economic uncertainty have changed this dynamic
• Bond vigilantes reacting to tariff announcements revealed hidden vulnerabilities in bond portfolios
• Long-duration treasuries (20-30 years) make little sense for individual investors despite their institutional utility
• Corporate bonds from companies with strong balance sheets may offer better safety than government treasuries
• Municipal bonds provide tax advantages and allow investors to leverage local knowledge
• Current inflation concerns suggest shorter bond durations (2-3 years vs. market average of 6 years)
• "All that is riskless is not US Treasuries" – questioning the fundamental assumption of risk-free government debt
• Rising rates can significantly impact bond values through duration risk (5-year duration means ~5% loss per 1% rate increase)
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Clem Miller (00:02):
Hello everybody and welcome to Skeptic's Guide to
Investing.
I'm Clem Miller and I'm heretoday with Steve Davenport and
we're going to talk about bondstoday and the role of bonds in
the current environment and someof the interesting things that
happened with bonds during therecent turmoil over tariffs.
(00:26):
I know I had a brief foray intobonds, which I regret.
After the turmoil.
Thankfully, I didn't put toomuch into bonds.
I felt it was at least you know, a little bit experimental on
my part and I quickly, quicklygot out of it.
(00:50):
But, steve, you're really thebond expert among the two of us.
Thoughts about what's going onright now with bonds, especially
in connection with this unusualmacro environment that we're
(01:11):
dealing with.
Steve Davenport (01:14):
I don't know.
Just like our gold discussion Ithink that this one has a lot
of heroin and I look at what'sgoing on with the debt ceiling,
I look at what's going on withthe budget and extension of the
tax cuts and I look at what'sgoing on with the reputation
around the world, and I thinkthat it's probably been there
(01:38):
have been few times where it'sgetting less and less clear that
treasuries as a home of safetyare necessarily the best place
for you.
I look at the owning of bondsand I think it's a good way to
have some income and some safetyassets so that when your risky
assets go down, you can turn tothat safety asset that's
(02:01):
probably gone up while theother's gone down and you can
take that and then buy themarket at a lower level.
I think it's good to havealternatives and to have that
form of safety.
When I think about safety, Ithink about each individual has
in their lives a certain amountof money that they're going to
(02:21):
need in the next 6, 9, 12 monthsthat they don't want to see
fluctuate every day, and so inthat sense, the question is be
in cash or be in bonds?
David Schawel, md, phd.
And I think that, with ratesnow in the 4% to 7% depending on
how much risk you take on forcorporates and high yield I
(02:44):
think there is risk you take onfor corporates and high yield I
think there is a reason to beowning bonds.
I think there is always areason, but it's particularly
compelling now.
Two or three years ago, when wewere talking about zero rates or
near zero rates, and mortgagerates were two and a half, I
thought that we did a disserviceto the industry by not telling
(03:07):
people that bonds weren't foryou.
We didn't tell people to getout of them.
Instead, we let people geteaten up by inflation and really
, when you think about it,that's the main driver.
Right, inflation, plus anyappreciation associated with a
(03:30):
particular currency could be agood reason to own bonds, but I
think it's highly likely thatwe're going to see inflation go
back up into the threes andperhaps four percent level,
which will make bonds need topay you more in order to be
(03:53):
worthwhile.
And that's really where I thinkthis whole, the whole area of
bonds, I think, has to startwith the Fed, because the Fed
determines the short-term rateand then, as we go out and we
get paid a risk premium for alonger duration, then we see
higher rates for the longer term.
(04:13):
We've had this inversion goingon for years now and I think
that the short rates have beenhigher, long rates have been
lower and I think it's been avery difficult time for the
average investor.
The average investor says Iwant safety, and by safety they
mean something that doesn't godown.
I don't think bonds have beenthat for us in the last two,
(04:38):
three, five years.
I think the bonds have been anasset that traditionally has
performed very well.
But I think that we've got toask the question is are the bond
vigilantes, who many peoplebelieve could be stronger at
analyzing risk and returns thansome of the equity analysts,
(05:07):
realize that the way the US isrunning is being run, the way
that international companies andinternational countries are
looking at their relationship tothe US and how much they want
to have in treasuries and howmuch they want to have in wands
and or, you know, differenteuros?
I think that people arestarting to say maybe the US is
a place I want to have some ofour assets, but I don't want to
(05:29):
have all of them there.
I think I want to hedge myselfand own some euros.
Clem Miller (05:34):
So Steve, can you explain to everybody what a who,
a bond vigilante is like, whatis a bond vigilante?
And also can you explain alittle bit about what happened
right after the tariffs?
Like, what were the bondvigilantes doing that resulted
(05:58):
in bonds seeing some lossesright after the tariffs?
I mean, shouldn't we seeingsome losses right after the
tariffs?
I mean shouldn't we, wheneverybody expected bonds to do
better than stocks, coming outof the tariffs, why did bonds
not do well?
Steve Davenport (06:11):
Well, I think that what you don't want to have
is bonds back up on you.
So if rates, if you buy a bondand it's a 4% and it's got a
five-year duration, then youexpect that if rates fall which
is what Trump has been callingfor Powell to reduce rates.
(06:32):
And some people believe that alot of this activity on tariffs
and all of this upheaval isreally about causing a slowdown
in the US so that the Fed wouldlower rates.
And if the Fed lowered rates,then your portfolio owning a
five-year duration 4% bond, youwould earn some capital gains on
(06:53):
that.
So bond vigilantes are saying Idon't see this as a slowdown, I
see this as a majorinflationary event.
And then rates go up.
So if rates go from 4% to 5%,that 1% move on a five-duration
asset is going to cause a 5%decline.
(07:16):
And so when you look at thatand you say, hey, I just lost 5%
, my bond coupon is only fourannually Now I'm underwater and
I haven't even received mycoupons yet.
And so I think that whateverybody is starting to realize
and why Trump had to put a holdon the whole idea of this
(07:39):
90-day period of grace periodwas because he was worried that
the financial system wasstarting to implode and he says
I can handle a recession, but Ican't handle a financial
blow-off.
And I think that that blow-upwas starting to occur.
And I think that when you lookat certain bonds high-yield
(08:01):
bonds that are on the borderlinethey started to drop into that
default risk category, and whenthere is default risk, there is
going to be somebody who has topay the price, and they bought
these bonds to get a little bitextra yield.
So if you took extra risk andhad a 6% high yield bond, all of
(08:23):
a sudden, when that bond marketstarts to back up, your
duration can be pretty long andyour risk can be pretty high.
So that's where people havegone to hide.
And what I would say is, if wefollow some of the Buffett
analogies here, you need to waituntil the tide goes out to see
(08:45):
who has their bathing suits on.
And I think that what we'reseeing is that some people have
taken more risk in the bondmarket and therefore they're not
really prepared for an upheavalin their bonds.
Most people look at bonds safety.
I think there are people whoare like I want my safety, but I
(09:07):
want just a little bit more,and that's where people get into
trouble.
That's where they say I'mreaching for an extra one or one
and a half percent and guesswhat, when I reach for it, do I
get it for free?
There is no free lunch.
So if you are taking on andgetting more risk and getting
more yield, therefore when thereis an upheaval you're going to
(09:31):
see more impact to your returns.
It's not the same amount as inequities.
Yes, the correlation isslightly negative, but what
we've seen lately is, yes, bondsdo go down and when rates are
moving up, which I think that,do you believe, like I do, that
(09:53):
tariffs are inflationary?
Yes, so if we believe that-.
Clem Miller (09:58):
I think they're stagflationary.
They're going to result in somedecline in US growth.
Plus, they're going to increaseinflation in certain areas and
probably overall.
Steve Davenport (10:16):
So I think if we look at the marketplace and
we say this asset has been aplace that has rewarded
long-term investors as a safetydepository, I think that when
you look at it as a place forsafety, then we have to ask
ourselves tougher questionsabout what is the best balance
(10:38):
sheet to be associated with.
And what I've been doingrecently is looking at more and
more corporates, because if Ilook at the balance sheet of a
Microsoft, I look at the balancesheet of a J&J, a Merck, I look
at theirs and say, gee, there'sa lot less debt here than there
is in the US.
The US government has nowstarted to be in a place where
(11:04):
and we're going to get into thisnext week with our guest Steve
Gattuso we're going to start tolook at what is the amount of
debt that the US has, that itbecomes a problem.
I know that we can printcurrency and produce and pay off
, but that again is inflationary.
And now that we've seeninflation and how it can affect
(11:27):
bond portfolios, I'm not surewe're ready as a country to go
back to times like the 70s whereinflation was a bigger problem.
And once you have inflation,it's not that easy to put it
back in the bottle, and so I'mafraid that the area of bonds
(11:48):
needs to be rethought and Ithink we need to rethink why we
own them, for what period oftime and then what duration I
think the other and credit riskand credit risk.
The other is credit risk, whichI was just going to mention
munis.
Munis are a bond that istax-free at the federal and the
(12:09):
state level.
So if you are in Massachusettsand you buy a Massachusetts
municipal bond, you are freefrom the state and the federal
level for paying taxes on thatincome.
So while it may only pay youthree and a half to four because
it's all tax-free, that's theequivalent yield of six if
(12:31):
you're at a 30% tax rate.
What does that mean?
That means lots of people whojust don't want to impact have
the government standing overthem asking them every year at
April 15th how much have youpaid me?
I think that when we look atbonds, we look for safety and we
(12:53):
look for things we can believeit.
I think that local you knowlocal ownership of munis is a
good way for individuals tounderstand.
I see this road, I see thetolls being collected.
I see this airport.
I always know it's well run andit looks great and it looks to
(13:14):
be in good condition.
Therefore, those municipalitygenerated assets you know can be
a very good source for you toput your money into something
that you have some control andlocal knowledge of.
Should you be picking individualbonds?
Probably not, but they arethere and they are an asset and
(13:37):
I think that when we look at itmuni bonds, mortgages, different
types of private debt there isa lot there and we could go into
that on a different podcast.
But I think what I would say istreasuries are not the king.
The king has lost some of hisluster and therefore I think we
(14:00):
need to be a little moresensitive and try to realize
that they're not non-negativereturning assets.
They do go down and when theygo down, when the payments are
low especially when we were downin the 2% range, you know a 3%
or 4% decline in the bond meansyou know that's two years worth
(14:23):
of interest.
So I think that you know youcan't afford.
When you have stocks paying,you know our dividend paying
stock portfolio is paying threeand a half, is it?
You know the four fromtreasuries?
No, it's taxed a little bitbetter, but it has appreciation
(14:46):
potential and it has income.
And so right now I'd say,depending on your position and
how much you need the income inyour portfolio, I think you want
to look at bonds a little morecarefully and potentially be a
little shorter.
So the average duration of theUS market, the aggregate bond
fund, is about six.
(15:08):
Six years duration means if youtake the coupons and you add up
all the coupons and then thefinal $1,000 at the end that you
should get paid when you handover your bond, it adds up to a
cash flow of about six years induration and I think that for
(15:29):
most people we should probablybe in the two to three-year
duration right now because wedon't know particularly whether
we're going up or down.
We don't know the impact oftariffs, we don't know the
impact of other inflationarythings like war in the Middle
East and how it's going toaffect oil prices, because oil
(15:49):
is a big component of our pricegauges.
So I would look at bonds rightnow and say they're there.
We understand that we shouldhave some, but I'm not sure that
we should go with the blindfaith that riskless treasuries
are riskless.
Treasuries are not riskless.
They still can lose that valueand I think there is some
(16:12):
question about how we run ourdeficits and how we manage our
country that are going to makeit harder and harder for people
to reattain that idea of theriskless status for US
treasuries.
Clem Miller (16:27):
Steve, I totally agree with you that treasuries
are no longer riskless.
I don't know how you wouldcalculate a risk premium on
treasuries.
You would need anotherrisk-free asset in order to make
that calculation, and I'm notsure that there actually is one
that one could-.
Steve Davenport (16:48):
I think that Bill Gross had the term, which
is we're the cleanest dirtyshirt in the laundry.
Yeah, and so I think all theshirts are wrinkled.
Clem Miller (16:57):
We all know that some shirts get more wrinkled
and are harder to iron, but Ithink it's it's really a
question and I personally Ithink it's a bit crazy for
somebody to invest, for anindividual investor to invest in
anything that has a longduration investor to invest in
(17:22):
anything that has a longduration.
Personally, I think that longduration bonds are really
something that institutionalinvestors should hold.
They're designed forinstitutional investors.
They're not designed for youand me, right?
If we're going to hold, youknow, if we're going to hold
bonds, in my opinion they shouldbe bonds that are, you know,
(17:48):
maybe just you know that youknow are used as a substitute
for cash.
You know slightly longerduration, higher yields in cash,
and if you can get that, Ithink that's okay as a
diversifier.
But I definitely would not golong treasuries.
(18:13):
I would also be nervous aboutbond funds.
Steve Davenport (18:17):
That I would also be nervous about bond funds
that go well beyond investmentgrade.
Yeah, there's many ways thatyou can lose money, and I think
that you want to understand whatyour duration is, you want to
understand what your yield isand you want to understand if
there's any other risks in thisETF or fund, and I think there
(18:41):
are people who are trying tomanage their duration by using
swaps and other instruments thatare derivatives, and those
people are trying to minimizeduration so that they can
minimize the impact of a pricechange caused by a change in
rates.
I think that there are somegood products out there and
(19:01):
there are some good people outthere doing good work.
I think that people who promiseyou just a little bit more
yield and you're really nottaking much risk.
You've got to ask the questionwell, what does much mean?
And I think that, just likeeverything else, you're the
person who has the most to lose,so therefore, you're the one
(19:22):
who has to take this and try towork with it in a way that makes
sense.
I think that you're right, clem.
I don't think a 20-year bondmakes sense.
I don't think a 30-year bondfor an individual makes sense.
When you look at those, they'reusually for insurance companies
and other people who have verylong duration assets and they're
trying to offset a liabilitywith an asset that has a
(19:45):
similarly long duration, and Ithink those people should use
those assets.
But the average person,somewhere between one or two and
somewhere between seven oreight, seem like the ranges that
I would.
If rates were to jump up hereand go back to six or 7% for a
while and sit in.
(20:06):
I think I might think about someof those, for, you know, there
is a point at which you'd sayI'm being compensated enough,
and I think the question is weknow that we need inflation to
help us with our debt, and thequestion is how do we have a
controlled inflation such thatit allows us, as a government,
(20:28):
to lessen our overall governmentdebt?
So I think it's going to be adiscussion that we continue to
have.
I think it's going to be adiscussion that we continue to
have, and all I'd say is, justlike, all that glitters is not
gold, all that is riskless isnot US Treasuries, so I'm going
to put a stop there.
(20:48):
Do you have any last points,glenn?
Clem Miller (20:51):
No, I think that's it.
Good discussion, steve, allright.
Steve Davenport (20:55):
Again, thank you everybody for listening to
Skeptic's Guide.
We appreciate your support andwe want you to share and like
what you see, and if you havequestions or ideas, please reach
out and contact us.
Thanks.
Hello everybody and welcome to Skeptic's Guide to
Investing.
I'm Clem Miller and I'm heretoday with Steve Davenport and
we're going to talk about bondstoday and the role of bonds in
the current environment and someof the interesting things that
happened with bonds during therecent turmoil over tariffs.
(00:26):
I know I had a brief foray intobonds, which I regret.
After the turmoil.
Thankfully, I didn't put toomuch into bonds.
I felt it was at least you know, a little bit experimental on
my part and I quickly, quicklygot out of it.
(00:50):
But, steve, you're really thebond expert among the two of us.
Thoughts about what's going onright now with bonds, especially
in connection with this unusualmacro environment that we're
(01:11):
dealing with.
Steve Davenport (01:14):
I don't know.
Just like our gold discussion Ithink that this one has a lot
of heroin and I look at what'sgoing on with the debt ceiling,
I look at what's going on withthe budget and extension of the
tax cuts and I look at what'sgoing on with the reputation
around the world, and I thinkthat it's probably been there
(01:38):
have been few times where it'sgetting less and less clear that
treasuries as a home of safetyare necessarily the best place
for you.
I look at the owning of bondsand I think it's a good way to
have some income and some safetyassets so that when your risky
assets go down, you can turn tothat safety asset that's
(02:01):
probably gone up while theother's gone down and you can
take that and then buy themarket at a lower level.
I think it's good to havealternatives and to have that
form of safety.
When I think about safety, Ithink about each individual has
in their lives a certain amountof money that they're going to
(02:21):
need in the next 6, 9, 12 monthsthat they don't want to see
fluctuate every day, and so inthat sense, the question is be
in cash or be in bonds?
David Schawel, md, phd.
And I think that, with ratesnow in the 4% to 7% depending on
how much risk you take on forcorporates and high yield I
(02:44):
think there is risk you take onfor corporates and high yield I
think there is a reason to beowning bonds.
I think there is always areason, but it's particularly
compelling now.
Two or three years ago, when wewere talking about zero rates or
near zero rates, and mortgagerates were two and a half, I
thought that we did a disserviceto the industry by not telling
(03:07):
people that bonds weren't foryou.
We didn't tell people to getout of them.
Instead, we let people geteaten up by inflation and really
, when you think about it,that's the main driver.
Right, inflation, plus anyappreciation associated with a
(03:30):
particular currency could be agood reason to own bonds, but I
think it's highly likely thatwe're going to see inflation go
back up into the threes andperhaps four percent level,
which will make bonds need topay you more in order to be
(03:53):
worthwhile.
And that's really where I thinkthis whole, the whole area of
bonds, I think, has to startwith the Fed, because the Fed
determines the short-term rateand then, as we go out and we
get paid a risk premium for alonger duration, then we see
higher rates for the longer term.
(04:13):
We've had this inversion goingon for years now and I think
that the short rates have beenhigher, long rates have been
lower and I think it's been avery difficult time for the
average investor.
The average investor says Iwant safety, and by safety they
mean something that doesn't godown.
I don't think bonds have beenthat for us in the last two,
(04:38):
three, five years.
I think the bonds have been anasset that traditionally has
performed very well.
But I think that we've got toask the question is are the bond
vigilantes, who many peoplebelieve could be stronger at
analyzing risk and returns thansome of the equity analysts,
(05:07):
realize that the way the US isrunning is being run, the way
that international companies andinternational countries are
looking at their relationship tothe US and how much they want
to have in treasuries and howmuch they want to have in wands
and or, you know, differenteuros?
I think that people arestarting to say maybe the US is
a place I want to have some ofour assets, but I don't want to
(05:29):
have all of them there.
I think I want to hedge myselfand own some euros.
Clem Miller (05:34):
So Steve, can you explain to everybody what a who,
a bond vigilante is like, whatis a bond vigilante?
And also can you explain alittle bit about what happened
right after the tariffs?
Like, what were the bondvigilantes doing that resulted
(05:58):
in bonds seeing some lossesright after the tariffs?
I mean, shouldn't we seeingsome losses right after the
tariffs?
I mean shouldn't we, wheneverybody expected bonds to do
better than stocks, coming outof the tariffs, why did bonds
not do well?
Steve Davenport (06:11):
Well, I think that what you don't want to have
is bonds back up on you.
So if rates, if you buy a bondand it's a 4% and it's got a
five-year duration, then youexpect that if rates fall which
is what Trump has been callingfor Powell to reduce rates.
(06:32):
And some people believe that alot of this activity on tariffs
and all of this upheaval isreally about causing a slowdown
in the US so that the Fed wouldlower rates.
And if the Fed lowered rates,then your portfolio owning a
five-year duration 4% bond, youwould earn some capital gains on
(06:53):
that.
So bond vigilantes are saying Idon't see this as a slowdown, I
see this as a majorinflationary event.
And then rates go up.
So if rates go from 4% to 5%,that 1% move on a five-duration
asset is going to cause a 5%decline.
(07:16):
And so when you look at thatand you say, hey, I just lost 5%
, my bond coupon is only fourannually Now I'm underwater and
I haven't even received mycoupons yet.
And so I think that whateverybody is starting to realize
and why Trump had to put a holdon the whole idea of this
(07:39):
90-day period of grace periodwas because he was worried that
the financial system wasstarting to implode and he says
I can handle a recession, but Ican't handle a financial
blow-off.
And I think that that blow-upwas starting to occur.
And I think that when you lookat certain bonds high-yield
(08:01):
bonds that are on the borderlinethey started to drop into that
default risk category, and whenthere is default risk, there is
going to be somebody who has topay the price, and they bought
these bonds to get a little bitextra yield.
So if you took extra risk andhad a 6% high yield bond, all of
(08:23):
a sudden, when that bond marketstarts to back up, your
duration can be pretty long andyour risk can be pretty high.
So that's where people havegone to hide.
And what I would say is, if wefollow some of the Buffett
analogies here, you need to waituntil the tide goes out to see
(08:45):
who has their bathing suits on.
And I think that what we'reseeing is that some people have
taken more risk in the bondmarket and therefore they're not
really prepared for an upheavalin their bonds.
Most people look at bonds safety.
I think there are people whoare like I want my safety, but I
(09:07):
want just a little bit more,and that's where people get into
trouble.
That's where they say I'mreaching for an extra one or one
and a half percent and guesswhat, when I reach for it, do I
get it for free?
There is no free lunch.
So if you are taking on andgetting more risk and getting
more yield, therefore when thereis an upheaval you're going to
(09:31):
see more impact to your returns.
It's not the same amount as inequities.
Yes, the correlation isslightly negative, but what
we've seen lately is, yes, bondsdo go down and when rates are
moving up, which I think that,do you believe, like I do, that
(09:53):
tariffs are inflationary?
Yes, so if we believe that-.
Clem Miller (09:58):
I think they're stagflationary.
They're going to result in somedecline in US growth.
Plus, they're going to increaseinflation in certain areas and
probably overall.
Steve Davenport (10:16):
So I think if we look at the marketplace and
we say this asset has been aplace that has rewarded
long-term investors as a safetydepository, I think that when
you look at it as a place forsafety, then we have to ask
ourselves tougher questionsabout what is the best balance
(10:38):
sheet to be associated with.
And what I've been doingrecently is looking at more and
more corporates, because if Ilook at the balance sheet of a
Microsoft, I look at the balancesheet of a J&J, a Merck, I look
at theirs and say, gee, there'sa lot less debt here than there
is in the US.
The US government has nowstarted to be in a place where
(11:04):
and we're going to get into thisnext week with our guest Steve
Gattuso we're going to start tolook at what is the amount of
debt that the US has, that itbecomes a problem.
I know that we can printcurrency and produce and pay off
, but that again is inflationary.
And now that we've seeninflation and how it can affect
(11:27):
bond portfolios, I'm not surewe're ready as a country to go
back to times like the 70s whereinflation was a bigger problem.
And once you have inflation,it's not that easy to put it
back in the bottle, and so I'mafraid that the area of bonds
(11:48):
needs to be rethought and Ithink we need to rethink why we
own them, for what period oftime and then what duration I
think the other and credit riskand credit risk.
The other is credit risk, whichI was just going to mention
munis.
Munis are a bond that istax-free at the federal and the
(12:09):
state level.
So if you are in Massachusettsand you buy a Massachusetts
municipal bond, you are freefrom the state and the federal
level for paying taxes on thatincome.
So while it may only pay youthree and a half to four because
it's all tax-free, that's theequivalent yield of six if
(12:31):
you're at a 30% tax rate.
What does that mean?
That means lots of people whojust don't want to impact have
the government standing overthem asking them every year at
April 15th how much have youpaid me?
I think that when we look atbonds, we look for safety and we
(12:53):
look for things we can believeit.
I think that local you knowlocal ownership of munis is a
good way for individuals tounderstand.
I see this road, I see thetolls being collected.
I see this airport.
I always know it's well run andit looks great and it looks to
(13:14):
be in good condition.
Therefore, those municipalitygenerated assets you know can be
a very good source for you toput your money into something
that you have some control andlocal knowledge of.
Should you be picking individualbonds?
Probably not, but they arethere and they are an asset and
(13:37):
I think that when we look at itmuni bonds, mortgages, different
types of private debt there isa lot there and we could go into
that on a different podcast.
But I think what I would say istreasuries are not the king.
The king has lost some of hisluster and therefore I think we
(14:00):
need to be a little moresensitive and try to realize
that they're not non-negativereturning assets.
They do go down and when theygo down, when the payments are
low especially when we were downin the 2% range, you know a 3%
or 4% decline in the bond meansyou know that's two years worth
(14:23):
of interest.
So I think that you know youcan't afford.
When you have stocks paying,you know our dividend paying
stock portfolio is paying threeand a half, is it?
You know the four fromtreasuries?
No, it's taxed a little bitbetter, but it has appreciation
(14:46):
potential and it has income.
And so right now I'd say,depending on your position and
how much you need the income inyour portfolio, I think you want
to look at bonds a little morecarefully and potentially be a
little shorter.
So the average duration of theUS market, the aggregate bond
fund, is about six.
(15:08):
Six years duration means if youtake the coupons and you add up
all the coupons and then thefinal $1,000 at the end that you
should get paid when you handover your bond, it adds up to a
cash flow of about six years induration and I think that for
(15:29):
most people we should probablybe in the two to three-year
duration right now because wedon't know particularly whether
we're going up or down.
We don't know the impact oftariffs, we don't know the
impact of other inflationarythings like war in the Middle
East and how it's going toaffect oil prices, because oil
(15:49):
is a big component of our pricegauges.
So I would look at bonds rightnow and say they're there.
We understand that we shouldhave some, but I'm not sure that
we should go with the blindfaith that riskless treasuries
are riskless.
Treasuries are not riskless.
They still can lose that valueand I think there is some
(16:12):
question about how we run ourdeficits and how we manage our
country that are going to makeit harder and harder for people
to reattain that idea of theriskless status for US
treasuries.
Clem Miller (16:27):
Steve, I totally agree with you that treasuries
are no longer riskless.
I don't know how you wouldcalculate a risk premium on
treasuries.
You would need anotherrisk-free asset in order to make
that calculation, and I'm notsure that there actually is one
that one could-.
Steve Davenport (16:48):
I think that Bill Gross had the term, which
is we're the cleanest dirtyshirt in the laundry.
Yeah, and so I think all theshirts are wrinkled.
Clem Miller (16:57):
We all know that some shirts get more wrinkled
and are harder to iron, but Ithink it's it's really a
question and I personally Ithink it's a bit crazy for
somebody to invest, for anindividual investor to invest in
anything that has a longduration investor to invest in
(17:22):
anything that has a longduration.
Personally, I think that longduration bonds are really
something that institutionalinvestors should hold.
They're designed forinstitutional investors.
They're not designed for youand me, right?
If we're going to hold, youknow, if we're going to hold
bonds, in my opinion they shouldbe bonds that are, you know,
(17:48):
maybe just you know that youknow are used as a substitute
for cash.
You know slightly longerduration, higher yields in cash,
and if you can get that, Ithink that's okay as a
diversifier.
But I definitely would not golong treasuries.
(18:13):
I would also be nervous aboutbond funds.
Steve Davenport (18:17):
That I would also be nervous about bond funds
that go well beyond investmentgrade.
Yeah, there's many ways thatyou can lose money, and I think
that you want to understand whatyour duration is, you want to
understand what your yield isand you want to understand if
there's any other risks in thisETF or fund, and I think there
(18:41):
are people who are trying tomanage their duration by using
swaps and other instruments thatare derivatives, and those
people are trying to minimizeduration so that they can
minimize the impact of a pricechange caused by a change in
rates.
I think that there are somegood products out there and
(19:01):
there are some good people outthere doing good work.
I think that people who promiseyou just a little bit more
yield and you're really nottaking much risk.
You've got to ask the questionwell, what does much mean?
And I think that, just likeeverything else, you're the
person who has the most to lose,so therefore, you're the one
(19:22):
who has to take this and try towork with it in a way that makes
sense.
I think that you're right, clem.
I don't think a 20-year bondmakes sense.
I don't think a 30-year bondfor an individual makes sense.
When you look at those, they'reusually for insurance companies
and other people who have verylong duration assets and they're
trying to offset a liabilitywith an asset that has a
(19:45):
similarly long duration, and Ithink those people should use
those assets.
But the average person,somewhere between one or two and
somewhere between seven oreight, seem like the ranges that
I would.
If rates were to jump up hereand go back to six or 7% for a
while and sit in.
(20:06):
I think I might think about someof those, for, you know, there
is a point at which you'd sayI'm being compensated enough,
and I think the question is weknow that we need inflation to
help us with our debt, and thequestion is how do we have a
controlled inflation such thatit allows us, as a government,
(20:28):
to lessen our overall governmentdebt?
So I think it's going to be adiscussion that we continue to
have.
I think it's going to be adiscussion that we continue to
have, and all I'd say is, justlike, all that glitters is not
gold, all that is riskless isnot US Treasuries, so I'm going
to put a stop there.
(20:48):
Do you have any last points,glenn?
Clem Miller (20:51):
No, I think that's it.
Good discussion, steve, allright.
Steve Davenport (20:55):
Again, thank you everybody for listening to
Skeptic's Guide.
We appreciate your support andwe want you to share and like
what you see, and if you havequestions or ideas, please reach
out and contact us.
Thanks.
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