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Interest rates may decline in coming months. However, they may also rise.
I offer these earth-shattering insights as a counter to the myriad analysts and commentators who confidently predict what interest rates will do in 2024. About them it can truly be said that “they are often wrong, but never in doubt.”
Humility is a virtue when predicting interest-rate movements because hardly anyone can do so consistently. Take the low in the bond market that occurred this past Oct. 19, when the Treasury’s 10-year yield rose above the psychologically crucial 5% level. We know now that over the subsequent two months this yield would drop precipitously to below 3.8%, and that bonds would soar. And we tell ourselves that it was obvious that this would happen.
But it was anything but obvious at the time. Consider the average recommended bond market exposure level on Oct. 19 among a subset of short-term bond market timers that my firm monitors. (In the accompanying chart, this average is represented by the Hulbert Bond Newsletter Sentiment Index, or HBNSI.) On Oct. 19, this average stood at minus 44.2%, which meant that the average short-term bond timer was recommending that clients allocate nearly half their bond trading portfolios to shorting the bond market—aggressively betting on higher rates, in other words.
Since 2000, which is how far data extend for the HBNSI, in only 4% of trading days was the average bond timer more bearish than he was on Oct. 19. His recommended allocation was dreadfully wrong, we now know. Over the subsequent two months, long-term Treasurys (as represented by the Vanguard Extended Duration Treasury ETF
EDV
) produced a 33% gain.
The bond timing community was almost as wrong in late December, when the 10-year yield hit a six-month low. The HBNSI got as high as 30.8% in the days leading up to that low, 75 percentage points higher than where it had stood at the Oct. 19 low. Once again the market did not accommodate the consensus: Vanguard’s Extended Duration has fallen nearly 10% since late December.
The last several months are not a fluke, furthermore. The vast majority of actively managed bond mutual funds and ETFs have failed over the long term to equal a simple buy-and-hold approach. To bet on a particular 2024 interest rate forecast would represent a triumph of hope over experience.
This doesn’t mean that your portfolio’s bond allocation should be zero. You can invest in bonds without betting on their short-term gyrations. Count on holding whatever bonds you do purchase for the longer term, only changing your allocation infrequently as there are changes to your risk tolerance level and to the risk/reward ratio for the other assets you own.
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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