⚡ LIGHTNING ROUND

📉 Market Pulse: TLT is still down ~50% from its 2020 peak. That’s a 20% portfolio hit if 40% of your 60/40 was in it.

💡 Shrewd Tip: Bond funds never mature. If you hold a 5-year Treasury directly, you get par back. If you hold a bond fund, you stay exposed forever.

🔥 Quick Win: Move “safe” capital into 30–90 day T-bills yielding ~5% — minimal price risk, daily liquidity.

🚨 Risk Signal: Unemployment under 5% + rising M2 = Powell stays hawkish. Long-duration funds stay vulnerable.

🎯 Action: Audit every fixed income holding. If the duration is over 7 years, it’s a speculation, not a safety play.

WEEKLY WISDOM

CRISIS ALERT

When Bonds Bite Back

In the past four years, the so-called ‘safe’ half of a 60/40 portfolio lost as much as the S&P did in the dot-com crash—without a recession. If that doesn’t scare you, you’re not paying attention.

We’re in a bond market regime that can quietly drain wealth from people who think they’re playing it safe.

Let’s set the stage with the hard numbers:

• Unemployment: 4.2% (January 2025). Economists call 5% “full employment.” We’re below that, which means Powell still has room to keep the screws on inflation.

• M2 Money Supply: ~$22 trillion and rising again after a rare year-over-year contraction in 2022–2023. Still about 10% below its long-term growth trend, but the rebound keeps inflation risk alive.

• Fed Funds Target: 4.25%–4.50%, held steady for months. The market is pricing rate cuts in late 2025, but “pricing” isn’t the same as “happening.”

• TLT 20-Year Treasury ETF: Down ~50% from its August 2020 high of $179 to around $89 today. That’s a 20% total portfolio hit if 40% of your 60/40 portfolio was in that fund.

• 10-Year Treasury Yield: Hovering in the 4.2%–4.4% range — a far cry from the 0.6% yields we saw in mid-2020.

Now the key point:

Bond funds are structurally different from individual bonds.

1. Bond Funds Don’t Mature

A bond fund is a perpetual portfolio. It constantly sells older bonds and buys new ones, resetting its interest rate exposure. If rates rise, the fund’s value drops — and it doesn’t “recover” unless rates fall back. You never get a par-value maturity date to bail you out.

2. Long Duration Magnifies Pain

Duration measures how sensitive a bond (or fund) is to rate changes. TLT’s duration is about 17–18 years, meaning a 1% rate rise can knock roughly 17–18% off the price. From 2020’s lows in long-term yields (~1.0%) to today’s ~4.4%, that math explains the ~50% drawdown.

3. Direct Bonds Give You a Clock

Buy a Treasury maturing in five years at par, hold it, and you get par back — plus the coupon payments — as long as the issuer doesn’t default. Price volatility in between doesn’t matter unless you sell early. That “end date” removes one of the nastiest risks in bond funds: the potential for permanent capital loss.

Why This Matters Right Now

• Powell’s Priority: He’s defending the dollar. With M2 rising and de-dollarization chatter growing among BRICS nations, the Fed is less likely to slash rates just to rescue asset prices.

• Inflation is Sticky: Even if CPI is moderating, services inflation and wage growth are still above pre-pandemic norms. A resilient labor market lets the Fed keep policy restrictive.

• Foreign Demand for Treasuries is Uncertain: Trade tensions and reserve diversification mean overseas central banks may not be the willing buyers they once were, pushing long yields higher.

What I’m Doing

Eliminating Long-Duration Funds

If a bond fund’s duration is 7+ years, I don’t want it in the “safe” sleeve of my portfolio. Those positions only come back if yields drop — and I don’t see a near-term catalyst for a deep drop.

Parking Cash in 30–90 Day T-Bills and Treasury-Backed MMFs

You can lock in ~5% yields today with virtually zero duration risk. That’s an asymmetric deal: strong income without price volatility.

Building a Ladder of Individual Treasuries

I’m staggering maturities over the next 1–5 years. Each rung returns principal at par, which I can then reinvest at prevailing yields. This smooths reinvestment risk and keeps capital intact.

Treating Bond Funds as Tactical Tools

I’ll use them to express a rate view — for example, going long duration when the Fed is clearly cutting — but never as the core of my defensive allocation in a rising-rate regime.

When I’ll Change My Mind

• Unemployment above 5% for multiple months — a classic recession signal that forces the Fed to prioritize growth over inflation.

• M2 growth flat or contracting again — easing inflationary pressures.

• Fed actually cutting rates — not just signaling, but moving the target range down.

Until then, I’m assuming long-duration bond funds have more downside than upside. The opportunity is in clipping short-term yields and keeping powder dry for when the macro picture shifts.

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The content provided in this newsletter is for informational purposes only and should not be considered as specific advice for any specific individual. The information is prepared by knowledgeable individuals and is not written by certified tax professionals or investment advisors. For personalized advice tailored to your unique financial situation, consult with a qualified tax professional, financial advisor, or attorney.

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