Spending any random hour listening to financial television, whether CNBC, Fox Business or Bloomberg, is likely to reveal a lot of talk about price action across stocks and cryptos, while if bonds are mentioned at all, it’s usually just in terms of yields. It’s as if you only buy stocks for price appreciation and only buy bonds for income. Yet the same inverse price-yield relationship exists for both. When stock prices rise, yields fall, just as with bonds. And when bond yields fall, prices rise, just as with stocks. The media’s distinct treatment belies the fact that their similarities overwhelm their differences. The only real difference is that the future income (cash flows) for bonds is known in advance (subject to credit risk, which is not an issue in the Treasury market Financology generally deals with), hence the moniker “fixed income”.
The result is that the monster bear market in bonds is relatively little remarked upon, compared to the prodigious amount of air time devoted to the bear market in stocks … or denial thereof.
Let’s take a closer look at this under-remarked upon area of finance.
One fund particularly well represents the US Treasury bond market: iShares’ GOVT. It tracks the entire UST market from one to thirty years maturity. It’s the closest Treasury analog I’m aware of to Vanguard’s VT for tracking the stock market. Together with gold, these two funds are really the only assets an American investor needs to have a broadly diversified and balanced portfolio.
From its all time high in August 2020, gold (using the gold fund IAU as a proxy to put them on equal footing), gold has declined about 14.5%. From its all time high in November 2021, VT has declined about 24.11% in price. From its all time high in July 2020, GOVT has declined 18.88%. This decline is particularly impressive given that the Treasury market – and GOVT by extension – is most heavily weighted in short and medium term securities. Longer term Treasury funds are down considerably more; VGLT for instance, which tracks the 10-30 year portion of the UST market, is down about 35%.
These are historic declines … GOVT fell from its all time high to its all time low – today – in under 27 months.
I hasten to point out that a major portion of these declines isn’t real … it’s an artifact of our choice of unit of account – the US dollar – having risen in value. Those who do their accounting in, say, yen would see a very different picture … but we’ve discussed that in more depth previously so won’t further belabor it here.
Having considered price, let’s look at yields. Today the three month Treasury yield closed at 3.29%, the six month at 3.87%, the one year at 4.08%, the ten year at 3.70%, the twenty year at 3.90%, and the thirty year at 3.65%. Such yields would have challenged the imagination a mere couple years ago, when many trillions worth of bonds around the world traded at negative yields and even a fraction of a percent seemed generous. That this was a historic bubble, obvious as it is now, was evident even then to many.
Next let’s look at stocks. The yield on VT is given at 2.34%. That’s a fair representation of the entire global stock market given an expense ratio of just a few basis points. Breaking that down into its exUS and US components, the yield on VXUS is given at 3.89%, and the yield on VTI at 1.53%.
Anything stand out? The yield on nonUS stocks is competitive with Treasuries. The yield on US stocks is not. Recalling that yield is simply the ratio of annual cash flow to price, US stocks would need to trade at about half their current prices for their yields to be competitive with nonUS stocks and US Treasuries. They have an air about them reminiscent of Wile E Coyote having run off the edge of a cliff but yet to look down.
This is of course not an exhaustive or in depth valuation analysis, but it is in line with exhaustive and in depth valuation analyses done by the likes of John Hussman, Jeremy Grantham, Rob Arnot, Robert Schiller, and even the famous market cap to GDP indicator favored by Warren Buffett.
At this point in time, there are good and sufficient reasons for Treasuries and non US stocks to be cheap. The exUS geopolitical and economic landscape pretty well explains the latter.
In the case of the former, we have the Fed exerting upward pressure on yields both through rate policy and forward guidance as well as direct sales, and foreign governments selling reserve assets in an effort to prop up their currencies. Japan is the poster child for this. It is known to have directly intervened in the forex markets just today to prop up the yen while the BOJ digs in its heels on maintaining negative yields on Japanese sovereign bonds, as the rest of the world’s central banks, behind the curve as they are, nevertheless leave it in the dust.
The question of which of these factors is likely transient and which will be left to dominate action in the coming weeks and months is left as an exercise for the reader.