My Favorite Bond Fund For The Next 15 Years

Interest rates have begun an upward long-term trend

My long-term views on interest rates and the bond market are:

  • Interest rates are going to continue to rise, albeit with strong countertrend rallies that could sometimes last several years.
  • Higher quality corporate bonds will outperform government bonds due to the extreme levels of government indebtedness and general fiscal mismanagement (at least in the United States).

The following monthly chart of the 10-year US treasury bond goes back to the early 1990s:

(Click on image to enlarge)

chart courtesy of barchart.com

And here is the daily chart of the 10-year US treasury bond going all the way back to the early 1960s:

(Click on image to enlarge)

source: Federal Reserve

It is my view that the 10-year US treasury bond broke out of its 35-year downtrend in early 2018 and is now on a long-term trajectory that will see interest rates gradually climb higher.

The primary issue at hand is that the US is running a budget deficit close to $1 trillion, interest on the debt is closing in on $400 billion per year, and the Federal Reserve is still on pace to let $360 billion of treasuries roll off its balance sheet in 2019 (although this could be reduced or stopped) which is the same thing as saying the Fed will be selling $360 billion of Treasuries in 2019. Altogether, we are looking at roughly $1.76 trillion of additional US treasuries that the market will need to buy in 2019. Assuming supply is greater than demand, interest rates will have to rise to encourage more buyers. I expect we are now closing in on another move higher in interest rates. Looking at the first chart above, I see a 10-year bond yield that is ready to make its next move higher.

It is important to understand that US treasury bonds are viewed by the professional investment community as a sort of benchmark for all bonds (mortgage-backed, corporate, etc.) so, in general, if treasury rates are rising, then the yields for other US bonds are also going to be rising. Furthermore, this will tend to put upward pressure on all developed market government debt. The following chart compares the 10-year US treasury yield to the 10-year government bond yields of some countries where True Vine Letter subscribers currently reside:

1 2 3
View single page >> |

Disclosures: VRIG is a holding in client & family portfolios that I manage. I have an economic interest in the fund.

I'm an investment advisor and owner of True Vine Investments, a ...

more
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.