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Think you know which way interest rates are headed? Think again.
I’m referring to what is perhaps the most important piece of the retiree’s financial puzzle: Fixed-income investments. Many retirees believe it is essential for their financial security to get out of bonds before they suffer as interest rates rise, and then get back in before rates fall come back down.
This faith in bond market timing usually leads to poor investment decisions, however. The belief that interest rate and bond market trends are readily predictable represents a triumph of hope over experience.
Consider one year ago, at the beginning of 2022, when interest rates were about to climb sharply and bonds would suffer one of their worst years in U.S. history. Today, with the benefit of hindsight, we tell ourselves that it was utterly obvious that this was about to happen.
Yet, in real time, it was anything but obvious.
Consider the recommendations made at the beginning of 2022 by the several dozen bond market timers who my firm monitors daily. Though they weren’t on balance bullish on bonds at that time, they weren’t particularly bearish either.
In fact, their average recommended bond market exposure level at the beginning of 2022 stood at the 32nd percentile of the historical distribution—relatively close to the middle of the bell curve, in other words. Had it been obvious that bonds were about to suffer their worst year in history, the bond timers would have been aggressively short—at the 0th percentile of the distribution.
In fact, as you can see from the accompanying chart, there were many weeks during 2022 in which the bond timers as a group were even more upbeat than they were at the beginning of the year. The chart plots the daily values of the Hulbert Bond Newsletter Sentiment Index (HBNSI), which represents the average recommended bond market exposure level among monitored bond timers.
A similarly dismal picture of bond market timing emerges from the track records of the 10 largest actively managed bond mutual funds, which between them manage more than a half a trillion dollars. All their managers needed to do to beat their benchmarks in 2022 would have been to keep their duration as short as possible (within the range of durations they’re allowed to invest in). Yet only half of them outperformed their benchmarks and the other half underperformed.
Longer-term track records tell a similar story. According to S&P Global’s SPIVA scoreboards, over 90% of actively managed mutual funds in long-dated U.S. Treasurys lagged their benchmarks over the last decade.
It’s a nearly universal tendency to rewrite the past to make it seem as though it couldn’t have happened any other way. This in turn leads us to believe that the uncertainty we face today is more extreme than ever before. But it’s not.
Just think back through U.S. history. It was not certain the U.S. would emerge victorious from either World War, for example. Nor was it certain that antebellum U.S. wouldn’t split in two, or that the U.S. economy would recover from the COVID-19 pandemic. And these are just a few of the more spectacular examples. If we’re honest, we have to admit that the uncertainty investors faced in the past was just as great as it is today, if not much more.
This tendency to rewrite the past as certain and predictable is what leads us to believe that bond market timing is easier than it really is. This is why it’s so important to subject our memories to regular reality checks.
This means studying what analysts, advisers and investors were actually thinking and saying in real time. When you do that, you will find that timing the bond market is never easy.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
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