Bond Market Commentary

Conservative investing misnomer

By Doug Drabik
August 8, 2022

For a very long period in time, nearly 41 years, Treasury rates have been on a general decline. That is until 2022 came around. So for a very long time, I have heard investors talk about wanting to stay “conservative” or short in maturity length because assuredly, interest rates were about to go up. Despite the persistent conviction to rising rates, year after year, in opposition, they continued to decline.

Hindsight decreed that the most successful action would have been to add duration. Locking in long term higher interest rates would have provided the better returns versus multiple short maturity purchases over a period of time.

The mantra going into any of these periods was the same. “I’m staying conservative – short in maturity.” My contention is backed by history. Staying short is not necessarily conservative. Staying short, going long or even doing nothing are in essence, decisions based on perceived future interest rate direction. If anyone really knew where future interest rates were going, a simple math calculation would tell us exactly how far out on the curve to invest. However, since we do not know what the future holds, all decisions present risk. The decision to do nothing and the decision to stay short are conjectures that interest rates will rise. The risk is that interest rates decline. The decision to invest long term implies an outlook for falling interest rates. The risk is that interest rates rise.

Today we are dealing with immense uncertainty. Pundits can’t agree on whether we are in a recession, whether the Fed will be able to curb inflation or whether dozens of other pertinent data and geopolitical events will wind up playing havoc on the markets. It is not a proper moment in time to be taking on unnecessary risks with fixed income investments and strategies. With the Treasury curve flat with infinite possible market turns, staying short does not necessarily equate to being conservative. Likewise, extending long constitutes its own risks.

Considering all the volatility and uncertainty, laddering bond maturities may represent the most conservative path for mitigating interest rate risk while the economic cycle completes its path. Again, this is not a time to reach or stretch duration risk or credit risk but equally don’t misconstrue that doing nothing or staying short is conservative. Bond ladder strategies can be shortened or elongated based on personal biases and therefore conservatively play into the volatile markets stirred by all the current uncertainty.

Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.

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