Is It Time To Buy Bonds Again?

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Bonds have been having a rough 2022.

Though to be fair, pretty much every asset class has too. The S&P 500 officially hit bear market territory in June 2022, Europe and the international markets are also down about 20%. Canada has been the over-performer this year, losing “only” 10% YTD, our export-heavy economy benefitting from the rise in oil and wheat prices caused by the war in Ukraine.

Bonds are usually supposed to be anti-correlated to the stock market, meaning that when stock markets go down bonds are supposed to go up as investors flee from risky assets to safer ones. That didn’t happen this year which is highly unusual, but then again inflation at 40-year highs is also highly unusual.

All this has led to a loss of investor confidence in bonds, which has only accelerated their decline. The Canadian bond index has, so far this year, declined by 14%. The US one is down 12%.

Again, highly unusual for bonds to move this much in either direction, so this is certainly an interesting time to be an investor.

That being said, I don’t think the current disdain for bonds is justified. I may be in the minority of investors right now, but there is a scenario in which owning bonds makes sense again, and I think that scenario will be coming up soon.

Why We Reduced Our Exposure To Bonds

We actually don’t have a lot of bonds in our portfolio right now. As we wrote about in our 2021 portfolio update, our yield needs suggested that we could afford to take on a more equity-heavy portfolio, so we re-balanced to 90% equity/10% fixed income. Right before stock markets started diving, as luck would have it.

To be honest, that decision wouldn’t have made much of a difference. The biggest counter-weight to the free-fall in stock markets right now is not bonds. Rather, it’s our Canadian stock market exposure. And that was, of course, blind dumb luck.

One deliberate move that we did make way back in April 2021 was to swap out our medium term aggregate bond fund for a short-duration bond fund. Because interest rate moves affect longer-duration bond values more than shorter-duration bonds, this is a move you do if you believe that central banks were going to raise interest rates in the near future, which at the time, I did.

Was this a little bit of active investing on my part? Technically…yes. I was betting on a future outcome that I didn’t know with 100% certainty.

But come on! At the time interest rates were at zero. The world was getting vaccinated (though with fits and starts) and it was starting to look like we weren’t ALL going to die a horrible death from this damned disease, so it stood to reason that interest rates would have to go up. I mean, there was just no other direction for it to go!

Anyway, at the time I had no idea that inflation was about to bite the world in the butt. Back then, the biggest story about Ukraine and its president was the time Trump tried to blackmail Zelenskyy to get dirt on Hunter Biden and then got impeached for it. It was…a simpler…time, I guess?

That being said, even though I didn’t foresee all the shit that would happen in 2022, I turned out to be right on my interest rate call. Central banks started hiking their main benchmark rate in March 2022 and it looks like they’re not going to stop any time zone. And as a result, being in short bonds turned out to be the right move.

Since I made that call, short bonds declined a lot less than the aggregate bond index did, and unfortunately, these days declining less than the average is considered a win, so…yay?

BUT, I know I can’t just hide out here on the short end of the yield curve forever. Eventually, I have to restore my original medium-term bond fund, and that takes me to our exit strategy…

When Bonds Start Looking Attractive Again

Vicki Robin and her husband Joe Dominguez wrote Your Money or Your Life. It was one of the first books to introduce the concept of financial independence to mainstream audiences, and while the concepts presented in the book about budgeting and retirement were revolutionary and still relevant today, the original edition’s advice about investing was not useful to modern audiences, as it boiled down to simply “Put all your money into government bonds and don’t bother with the stock market at all.”

The reason for this is that at the time of Your Money or Your Life’s original publication, government bonds were yielding north of 15%. And not only that, interest rates were going to begin a long, sustained downward trajectory. This had the effect of making bond prices go up, as those government bonds paying that nice, juicy 15% interest rate were suddenly more desirable in an environment when investors were lucky to get anything north of 4%. So that investment advice turned out to be spot on for the time.

That’s because there are 2 major macroeconomic factors that affect how attractive bonds are. Namely, their current yield and the direction of future interest rate moves by the central bank.

When yields are low and interest rates are on a rising trajectory, it makes sense to reduce your bond holdings and shorten their durations by switching to a short-duration bond fund like BSV (US) or ZSB (Canadian). This will reduce the damage that rising interest rates have on your portfolio, like right now.

Conversely, when yields are sitting at higher levels and interest rates are neutral, you should increase your bond holdings and pivot back to an intermediate bond fund like BND (US) or VAB (Canadian). This is because not only will you be able to lock in a higher interest rate on the fixed income side of your portfolio, you may even get a capital gain if the central banks decide to drop interest rates in the future.

It’s All About the Timing

The big $1,000,000 question, though, is when is it a good time to pull the trigger? When should we sell off our short bonds and re-invest back in the aggregate bond index tracked by the ETFs BND (US) or VAB (Canadian)?

The short answer is: When interest rates stop rising.

Now normally, interest rate moves are just as impossible to predict as stock market moves. And as a passive investing evangelist, I have been teaching that the best way to invest is to not try to predict anything and trade as if the news doesn’t matter.

And I still believe that.

However, over the last 2 years, I’ve realized that when it comes to the bond market, there are a few scenarios in which it is possible to predict the future direction of interest rates with a reasonable amount of certainty.

The first is when interest rates hit zero. Neither the US or Canadian central banks subscribe to negative interest rate policy, and that means that once interest rates hit the floor of how low they can go, they can only go in one direction after that: Up.

The other, I believe, is when interest rates are rising for a very specific reason and that reason goes away. We know why central banks are raising interest rates: to combat high inflation.

So all we have to do is wait for inflation, which is reported to the public by the government a few weeks before each central bank announcement, to fall with the target range of 2%-3%. At that point, the central bank will likely stop their hikes, and that’s when I’m planning on moving back to the intermediate-duration bond index, indicating that I no longer have a strong opinion on the future direction of interest rates.

Again, I have no idea when exactly this will happen, but you can bet I’ll be watching inflation indicators closely over the next few months. And as always, before I make any major decisions about our investing strategy, I will disclose it on this blog so that you can follow along if you think I’m right, or mock me incessantly if you think I’m wrong.


So that’s my strategy for our portfolio’s bond holdings. Wait until inflation falls back to normal, and when that happens, sell my short bond holdings, and buy back into the “normal” bond index ETF.

Depending on where interest rates settle, I may even change my portfolio allocation back to a more balanced fixed income allocation. I mean, if I’m looking at bonds yielding 10% or something like what Vicki had, you bet your ass I’m loading up on those puppies.

What do you think? Did you do anything different in your bond holdings this year? And if so, what are your plans for the future? Let’s hear it in the comments below!

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35 thoughts on “Is It Time To Buy Bonds Again?”

    1. That’s literally the first thing I thought when I read that sentence…I can’t find anything else on the web saying they were married.

    2. I also paused at them being married! If you pay attention to Vicki Robin’s non-YMOYL projects, she does talk about Joe as her late partner, and on her website bio she also speaks of Joe as her partner. That being said, I’ve never heard her or anyone else state that they were married. (For those that only know YMOYL, Vicki Robin has also written a book called Blessing the Hands that Feed Us, about local food/economies, and currently hosts a podcast called What Could Possibly Go Right in partnership with the Post-Carbon Institute. They’re both amazing.)

    3. You’ll be waiting for GODOT if you’re waiting for inflation to come down to 2-3%. The FED will soon be forced to publicly announce their new ” comfort level for inflation” in the 4-5% range….. Highly recommend you listen to Greg Foss ( A fellow Canadian) speak about Credit markets, bonds and Bitcoin. Once you realize FED FUNDS rates can never go above 3-3.5% ever again and thus most diversified Bond Funds will never keep up with intermediate- long term inflation ( even the low ball CPI) you’ll be running from bonds!

  1. I am thinking that using some of your Yield Shield ideas might also be a valid stop-gap measure over the mid-term and or some gas and grain etfs may still be worth researching like Buffet is doing ? though some of those may have peaked for now etc etc … maybe hold more in cash for a several months even with inflation-deflation on the table …. your Bond ideas in theory seem plausible … though Ray Dalio’s super debt cycle climax ideas may cause a problem there too?

  2. we are heavy on prefered shares for our yield shield, on the positive side the yield is around 5.5% VS 3.1% for BND, on the negative side the expense ratio is higher at 0.23% VS 0.01% for BND. I am trying to figure out the correlation between the two, it seems that they follow each other relatively consistently but PFFD is more volatile. Now the question is, is it better to stick with PFFD, switch to BND or keep a mix of both…?

        1. Preferred shares have no protection in case of bankruptcy and dividends can be cut at no harm to the company if they choose to do so, although they refrain to do it because it will give them a very bad reputation.

          Bonds offer you a good protection in case of a bankruptcy (you are likely to recover some of your capital) and interest payments are mandatory, which mean they will trigger a bankruptcy if the company miss a payment and you will recover your money before all the equity holders, including preferred shareholders.

          1. I understand the risk for individual stocks but PFFD is a fund where the top 10 holdings represent only 16% of the assets so it seems to me that even though the risk of bankruptcy or cutting dividends is higher than with bonds the impact on the fund would be limited

            1. You have less risk through diversification, although you could face steeper losses with a preferred shares ETF than bonds ETF in case there is some kind of systemic problem in the economy, like a financial crisis or a very bad recession.

              That’s the reason you get a better yield with preferred shares. Investors take that risk into consideration and they ask for a better yield (ie. they pay less for the shares).

              If you want more security, you buy bonds ETF. And for maximum security, you buy federal bonds only, but you also get the lowest yield.

  3. i moved to an income portfolio in 2020 .. sold off all my bonds and went 100% funds .. it was a good move …

    now i am 90/10 like you … the FI now however is in preferred shares within split share funds such as FTN.PA.TO .. always trades around $10 but pays about 7% dividends …. much better than bonds ..

    i remember that book.. . it started me off . however we were too late .. the rates had dropped a lot since it was written

  4. “So all we have to do is wait for inflation … to fall with the target range of 2%-3% … Again, I have no idea when exactly this will happen, but you can bet I’ll be watching inflation indicators closely”


    Well, as of today, there’s one thing we all know with some certainty: Inflation has peaked.

    My guess is that inflation will fall to 3% around Feb. 2023.

    What’s your guess?

    1. 0 chance of inflation hitting 3% in the next year or more. Remember, if looking at CPI as the gauge, this number is cooked and ” massaged”. They’ll have to massage it heavily in next 3 months so the Fed can pause rate increases in advance of the mid term elections in the US. It’s the only way the current administration won’t have BOTH high inflation and markets in the tank when voters pull the levers on November….

  5. If you are looking for a clue about future inflation, you shoud listen to Dortor Cooper. And what he is saying right now is pretty grim …

    Cooper was still up 3% YTD at the beginning of June 2022. Today, it is down -23% YTD. The last time it had that steep of a decline was at the beginning of the financial crisis (2008).

    We could be in for a pretty bad recession if the Fed continues to raise interest rates like this. I mean.. we should use the real word : we may get into an economic depression if central banks continue to raise interest rates even higher.

    That would also explain why the long term interest rate have decreased so dramatically recently. The 10-years treasury yield is near 3% compared to 3.5% one month ago. The peak in interest rates may already be behind us …

    My view is that interest rate hikes are close to an end. Maybe they will have to stop raising interest rates in September or November. Any raise beyond that, I don’t think the economy will be able to sustain it.

    That said, I still think the best place to be when interest rates stop rising is equities. Their upside potential is unlimited whereas upside in bonds are limited. Plus, they are super cheap right now. Commodities should be a good place to be as well, which means that the Canadian stock market may continue to outperform.

    I’m still 100% in equities. That was a rough ride so far this year. But I still think this will be the best investment strategy in the future.

    Note : Those are only my opinions. I may be right or I may be wrong. Only the future will tell !

      1. It’s never been 2-3%. That’s simply the massaged, CPI figure. If you calculate inflation by 1980 standards when CPI was created, inflation is more like 15%. The reason even the publicly reported CPI will never go to 2% is the ever ballooning debt load and debt servicing costs, which paint central banks into a box and hamstring their ability to raise rates above 2.5-3.0%. As time progresses and debt grows, the terminal rate they are able to raise rates to decreases. Look at a simple chart of the Fed Funds rate over time perhaps? With a diminished agility to raise rates, inflation targets will rise over time. Just basic math and don’t need a crystal ball. Be careful what you believe!

    1. Spot on and great assessment. Don’t forget how hard Bitcoin will rip once the pivot happens in the coming months!

  6. Some people have suggested public utility stocks/etf’s as an alternative to bonds….that is until PG&E, the public utility serving Northern California, pretty much wrecked the reputation of utilities as “risk free” investments…

    ….bonds are a tough call. Other than an old shoe box stuffed with “EE” bonds that grandma got me when I was a kid, I don’t have any bonds, but I may rethink that soon. later years after grandpa passed away, I recall my grandmother, other than her home, had all her money in “E/EE” bonds. She had stacks and stacks of them. These were extremely blue collar working class people who would only invest in what they felt was iron-clad and totally risk free. I saw this mighty stack back in early 80’s, and I bet the face value alone was north of $100K..and consider that most of those bonds were yielding in the high teens-%…. oh man !! The good old days !!

  7. I wonder how much will inflation be when/if bond yields 10%!!! We have to look at real yield people. You in developed countries sometimes forget about inflation but we in EM sure know what that can do to a portfolio. Watch out for it.

  8. I’m more familiar with the stock market than the bond market so let me know if I’m wrong here, but wouldn’t the bonds market react to inflation announcement immediately? Everyone knows the link between the inflation announcement and the rate hike. The market doesn’t need to wait for the actual rate increase? I’m just thinking that you will be a step late in executing the switch.

  9. Let’s not forget bond values also increased by 10% a couple years ago too when rates were falling so the pace of price movement isn’t that unprecedented. Easy come easy go in that sense

    Canadian stock market losses are also mitigated compared to SP500 in large part from the decline in the CAD vs USD

  10. The one big issue I’m having with this blog lately is that there seems to be a lot of “timing the market” being discussed and one of the main things I liked about this blog’s overall attitude was that you could set a course for FIRE by replicating Kristy and Bryce’s strategies and NOT worry about this type of timing. The attraction for me of FIRE principles is keeping it simple and letting the time in the market play out..this type of jumping in and out of asset classes is all speculation and market timing that I have no interest in.

    1. Agree. active investing for vast majority of retailer investors is a losing game where buying high selling low is where the market hunches lead.

      Respectfully, that seems to also have happened on their switch to overweight equities right before the correction. and if theyre now talking about swapping equities back to bonds just six months later, that’s also selling equities low for it and too much tweaking for most people to pull off successfully than just staying the course

    2. What? Investing more heavily in bonds when rates go up is far from timing the market guys!
      Bonds are VERY VERY different than equities. FED basically tell us what they will do months in advance, it’s no crystal ball.

  11. I have BND in my portfolio. Currently down. Which is the better option, keep buying BND, sell BND at a loss and buy short term bonds, or just buy short term bonds until inflation hits the 2-3%?

    1. Ted- I cant tell you what to do with your bonds, but inflation is not EVER going back into the desired 2-3% box. Time for plan “B” mi amigo!

  12. Sounds like a lot of hard work when you are going to be travelling again, probably sitting on a nice beach in Thailand!

    Be nice to see what difference it makes to the original fixed percentage portfolio over this time period. To see how well or not the set and forget portfolio goes!

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