This quarter’s commentary focuses on fixed income, or more plainly, bonds, an asset class few are excited to discuss.
The harshest critics view bonds as ticking time bombs, one inflation or sovereign debt shock away from catastrophe. A larger cohort simply sees them as a waste of capital, an asset class doomed to deliver negligible real returns. And then there are the investors who own them, not for their love of fixed income, but as a necessary evil. When you canvass the market, it is hard to find anyone who simply likes bonds, much less loves them.
The disdain is understandable. Bonds lost money this year, and performance over the last decade is the worst on record. But falling bond prices also mean higher bond yields. At quarter end, the 10-year Treasury yielded 5.3%, its highest level since 2002. An investor today earns more income for each dollar invested, and that income provides more cushion against future rate increases. That is the great thing about bonds, you can run the math, and today the math is the best it’s been in decades.
This quarter, we have traded our usual narrative for a set of questions, the ones we hear most often and a few we are asking. The first half covers what happened with interest rates and why. The second half covers investment implications, and more specifically, Annandale’s positioning.