Short-Term Bonds Are a No-Brainer At This Point, but What About Long-Terms?

investing.com:

A triple whammy hit global bond markets last week, with the Bank of Japan loosening its yield curve control program, Fitch downgrading U.S. Treasurys, and rising commodity prices reviving the narrative of “higher for longer” for the Fed funds futures.

This combination of factors led to extraordinary volatility in the usually stable long-term bond market. Japanese 10-year yields shot up roughly 27% on the curve control news and went on to rise another 10% in the following days.

While the general stock market responded to the numerous events by producing its first negative week in quite a while, it is safe to say that stocks remained overall unfazed by the big undergoing shift in global capital markets.

Stocks generally dominate the headlines because they are an easier, sexier way to assess the day-to-day movements of the economy — plus, they offer the illusion of making you rich quickly. However, the most important variable for capital markets over the long run is the cost of money over time.

The current combination of factors suggests that investors are progressively pricing in higher interest rates and inflation for longer, along with increased default risks to higher debt and swift changes in the global bond market.

While this has produced a general selloff in U.S. bonds (remember, bond yields and bonds prices move in opposite directions), some investors of the likes of Warren Buffett and Ellon Musk see the situation as a contrarian opportunity to add some juicy short- and long-term maturities into their portfolios. Conversely, billionaire Bill Ackman has been massively shorting 30-year bonds.

Let’s take a look at their cases to evaluate whether it is a good time to get into action or not.

Higher interest rates