"This Time Is Different" Should Be Banned From Every Investor's Vocabulary
Conditions are definitely unique in today's bond market - and investors' strategies should be too.
By Paul Rubillo ·
I just read Ben Carlson's tweet comparing Treasury yields from March 2020 to today and had to stop and compare it against the timeline in my head! The 30-year at 1%. The 10-year at 0.5%. A 3-month bill paying you literally nothing. Wait what? Nothing?
Fast forward to today and that same 30-year is sitting at 5.4%. The 10-year at 5.1%. Even the 3-month bill is paying 4.1%. This is more than the entire yield curve was offering five and a half years ago, combined and then some.
Remember when everyone said rates would stay low forever?
I do. I remember the takes. "Demographics mean rates are pinned near zero permanently." "Japan already showed us this movie." "The Fed will never let yields rise because the debt service becomes unsustainable."
March 2020 was Covid and the world was on fire, the Fed had just slashed rates to zero, and buying a 30-year bond at 1% felt like the closest thing to a permanent floor under the market that existed. Hindsight makes the reversal look obvious. Living through it in real time, the case for "lower forever" sounded completely reasonable.
The lesson isn't about rates. It's about certainty.
Every cycle produces its own version of "this time is different." In 2020 it was zero rates forever. In 1999 it was that price-to-earnings ratios didn't matter anymore. In 2005 it was that home prices didn't go down nationally. Also, who can forget April 2020, when WTI crude oil futures actually traded negative? As in, producers were paying buyers to take barrels off their hands because storage was so full there was nowhere left to put the oil! The specific belief changes. The overconfidence behind it doesn't.
For fixed income investors specifically, this is the tuition-free lesson sitting right in Ben's numbers: duration is a bet on a future you can't actually see. Locking in a 30-year bond at 1% seemed like a safe bet to some at the time. However, the move from 1% to 5.4% on the long bond represents one of the worst multi-year stretches in Treasury market history for anyone who reached for that "safe" long duration at the bottom.
What this means going forward
I'm not telling you today's 4-5% yields are permanent either. Heck, we may still have farther to run if the deficit overhang gets bond vigilantes to get even more cranky! The point isn't to predict where yields go next. The point is to stop pretending you can know with certainty.
Build a portfolio that survives being wrong
That's the case for laddering maturities instead of betting everything on one point on the curve. It's the case for keeping some allocation in shorter-duration and floating-rate instruments that don't get torched if rates keep climbing. And it's the case for treating any headline that starts with "rates will never..." as a signal to get more diversified, not less.
Lesson learned
Five years ago, an entire generation of investors was pricing in permanence. The market had other plans. It always does. Ben's tweet is a fresh history lesson.
Time to go yield hunting but get to laddering.