The Asterisk Around Bond Safety
Protection isn't what it used to be.
By Paul Rubillo ·
Every conversation about bonds as a "safe" asset needs an asterisk next to it at the moment. Bonds' protecting purchasing power is entirely about which inflation environment you happen to be sitting in when you need that protection.
The four environments that actually matter
The 2000-2025 analysis breaks the world into four buckets: inflation low and falling, low and rising, high and falling, high and rising. Bonds did fine in the friendly environments, low inflation gives a bond's fixed coupon real purchasing power, and falling inflation means today's yield looks even better in hindsight. The environment that breaks the thesis is the one we've spent most of this year writing about: high and rising inflation, the exact backdrop behind the worst quarterly move in the 10-year since 1994. In that regime, bonds alone didn't just underperform, they lost purchasing power outright.
Why trend following is the fix, not a replacement
Look at the 100/100 stack chart. Low and falling inflation delivers the best outcome by far, over 7% real annualized return, which makes sense, that's the environment where both bonds and trend-following strategies tend to thrive simultaneously. The number that actually matters is the high-and-rising bar. Bonds alone went negative there. Stack trend following on top, and that same environment turns modestly positive, somewhere around 3-4% real.
Trend following isn't there to boost returns in the good years, bonds already handle those fine. It's there to cover the exact scenario where bonds structurally can't do the job, because a trend strategy can go short duration, long commodities, long the dollar, whatever the prevailing trend actually is, instead of being stuck holding a fixed coupon while inflation eats it alive.
The volatility tradeoff is real and shouldn't be glossed over
Look at the x-axis on the chart. The low-and-falling scenario that produces the best returns also carries meaningfully higher annualized volatility, something like 15%, compared to a much tighter band for the weaker-performing environments. A 100/100 stack is explicitly introducing leverage, a full dollar of bonds plus a full dollar of trend exposure. You're trading away bonds' traditional role as the calm part of a portfolio in exchange for a structure that can actually survive an inflation regime bonds alone cannot.
Why this matters given everything else we've covered
This is the same theme running through nearly everything we've written this year. Floating rate notes exist because fixed coupons get crushed by rising rates. The 1981 Volcker piece exists because inflation psychology, once unanchored, requires brutal intervention to fix. The commercial real estate and reinsurance pieces exist because duration mismatch punishes anyone caught holding long-dated fixed income when the regime shifts underneath them. This chart is the cleanest illustration yet of the underlying lesson: duration alone is a bet on which inflation regime shows up. There is no single asset class, bonds included, that is built to win across all four.
The bottom line
A 50/50 split between bonds and trend following is the more conservative version of this idea. The chart's real message is that a portfolio built only for the low-inflation decades we just lived through is not the same portfolio you want heading into a decade where high-and-rising inflation is back on the table. In reality, nobody actually knows which of the four environments shows up next, but we are staying close to the situation and waiting for those signals to flash.