![]() ![]() Labour gains are very strong but don’t forget labour is very lagging. Which, of course, brings up the economy – it’s doing great. Crowded trades can be dangerous if or when the tide turns. The CFTC non-commercial combined positions have a strong bet calling for yields to keep rising (prices falling). Sentiment, which is often a contrarian indicator, is very negative on bonds. That being said, once you have finished patting yourself on the back for having low duration or underweight bonds, this could prove to be an opportune time to start adding duration or simply adding to bonds for a few reasons beyond the fact that yields are much more attractive than they were a few short quarters ago. ![]() Could it be around 3.0%? 4.0%? Could yields overshoot to the upside? The previously highlighted reasons driving yields are still present. We are not going to pretend we know when this bond sell-off ends. There is a solid ‘buy the dip’ mentality for equities that has been reinforced over the past few years. This raises an interesting thought experiment. Unlike equities, when bond prices fall (yields rise), the future expected return on bonds automatically goes up. Now at 2.45%, it is much more complicated. The portfolio construction call to be low duration and underweight bonds was very easy when 10-year yields were sitting at 0.7% in Canada and the U.S. While still down, short bonds held up even better. The universe held up a bit better but still down almost 7.5% over the past six months. Clearly, long bonds (long duration) have been the hardest hit. bond markets using the more popular ETFs as proxies. The following chart shows the total return in the Canadian and U.S. Short duration + underweight bonds = a WIN. Let’s all take a moment to pat ourselves on the back. Add to this our own stance within multi-asset portfolios we help manage. We believe this portfolio positioning to be pervasive based on seeing it in the VAST MAJORITY of investor portfolios and advisor models our team has had the opportunity to analyze. Perhaps one of the most pervasive ‘right calls’ that the market is now rewarding is the short duration stance within the fixed income portion of the portfolio coupled with underweights in traditional bonds. #Echelon insights freeWe bought it a while back on free cash flow and cyclical yield. For a recent example, if you own Nutrien, you probably didn’t buy it thinking there was an agriculture supply risk stemming from a Russian invasion of Ukraine. And it is even better than just happening to be in the right place and rewarded by a market move, which happens more often than you might think. When investing, whether you’re a portfolio manager, advisor, or individual, nothing is as rewarding as making the right call and then being proven right by the market. ![]()
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