Another asset class suffering permanent value destruction
In another note we introduced the idea of permanent value destruction vs the temporary variety. Hundreds of Cryptocurrencies and recent IPOs without earnings were examples. But these markets are relatively small when compared with the bond market.
Total outstanding US Government Bonds are worth over $30 trillion, almost as big as the US stock market. The chart below illustrates that long term treasury bonds have suffered losses in 2022 even worse than those suffered in the stock market.
Long Term Treasury Bond Price vs S&P 500
As interest rates rise, bond prices fall. Without going into the math that explains this relationship, it might be easier to think about what happens to house prices when mortgage rates rise. It’s a similar mechanism.
For prices of these bonds to recover the losses suffered this year, interest rates would need to fall back near to 1% from the current 3% levels. The Federal Reserve has made that an impossibility.
At the beginning of past bear markets in stocks, there was an opportunity to sell stocks at high prices and buy bonds yielding between 5% and 6%. There was a place to hide. Not this time. Anyone who bought bonds in the early part of 2022 has lost money. The example above is a worst case example, but trillions in bond values have been lost and unlike stocks with rising earning power over time, the losses will be permanent.
At Dock Street we have avoided long-term bonds and the losses they’ve suffered, but our short-term fixed income investments have yielded very little in the last few years. With treasury bond yields over 3% there is now an opportunity to earn decent returns on a risk free basis. We will be making changes to our fixed income holdings which will increase income across all our managed portfolios.
Daniel A. Ogden
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