The iShares Core US Aggregate Bond ETF (AGG) returned -0.05% for the year after returning 1.62% for the 4th quarter. Longer term treasuries, measured by the iShares 20+ Year Treasury Bond ETF (TLT) returned, -2.07% for the year after gaining 4.16% for the quarter. High yield, measured by the iShares iBOXX $ High Yield Corp Bd ETF (HYG) was down -1.93% for the year, giving up -4.34% in the fourth quarter.
Treasuries started to perform somewhat differently than they have in recent past. Some have been selling by foreign nations (Russia all but removed all Treasuries from their reserves in exchange for gold and other currencies). We see short term potential for US treasuries as treasury yields have somewhat broken out from their typical historical ratio to the cooper/gold ratio, but long term, we don’t like the prospects of the only developed nation with plans to significantly increase their annual deficit over the next 5 years. Interestingly, US Savers became the largest owners of treasuries, which leaves us questioning, are we becoming Japan?
US Treasury Yields
Treasury Rates to Cap Out
Before we transition to alternatives, we thought it interesting to note the changing dynamics occurring between equities and treasuries. Diversification benefits of treasuries appear to be diminishing:
Commodities, measured by Invesco DB Commodity Tracking ETF (DBC), returned -12.02% on the year, after giving back all gains and then some in the fourth quarter, returning -18.47%. Alternatively, Gold, measured by SPDR Gold Shares (GLD), ended the year down just -1.54%, after recovering 7.84% in the fourth quarter. The Bloomberg Galaxy Cyrpto Index (BGCI) was down -81% for the year and -65.4% for the fourth quarter. We have been using a specific market neutral ETF for quite some time that finally showed its true colors in the most recent market volatility; the AGFiQ US Market Neutral Anti-Beta ETF (BTAL) returned 4.7% for the fourth quarter, and 14.7% for the year. Treasuries will no longer be as impactful of a diversifier as they once were and its extremely important to analyze your alts at time like this to make sure they are at least somewhat alternative in nature.
Two occurrences we mentioned as potential signals of an upcoming recession in our last commentary continue to show signs of breakdown. Traditional recessions are preceeded by inverted yield curves and expanding high yield credit spreads. Despite this information, trying to time such an occurrence is unlikey to result in a benefit. Credit spreads have begun to expand two other times over the course of this recovery, only to revert back to historical lows. Even when they do continue, determining the time in which it may occur is challenging in the face of market volatility. Historically, these trends would imply market disruptions in the next 6 to 24 months, but in a world where a tweet can significantly distort global markets, we caution over taking action according to emotions due to these signals. Extreme positions in volatile markets requires optimal timing and hindsight in a forward journey where we simply don’t always have a clear path.
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