So far this year many investment classes have suffered sustained losses. Inflation has risen to cycle highs and the S&P 500 is down nearly 20% while the Bloomberg Global Aggregate Bond Index has lost $2.6 trillion, a record slide from its high in 2021. The last time a drop of this magnitude occurred was 2008. A traditional 60/40 equity and bond portfolio, which is supposed to buffer investors when either bonds or equity decline, has not worked as both have declined in tandem. A couple bright spots have been cash and private credit.
The S&P 500 index has declined 18% year to date while the Bond market has lost trillions of dollars in value.
Every bond class has suffered with longer duration suffering the most.
Source: St. Louis Fed FRED Economic Data; Board of Governors of the Federal Reserve System (US)
Bond prices may have further to fall as they have yet to react to historical relationship with inflation as shown in the chart below. Given current inflation rates, the 10-year bond yields could be 3 or 4 times higher than the current yield of about 3%.
But will bond yield rise? While currently low in relation to the last 70 years, the 10-year bond yield has retreated the last two times it has reached current levels as shown in the chart below. This time inflation is way different but a continued rise in the 10-year yield is by no means a certainty, especially if historically high levels of global debt and rising rates make debt service difficult causing a recession.
Source: 22V Research via John Roque
Private Credit Doesn’t Care True cash has maintained its notional value relative to bonds and equities. However, despite a 50bps increase by the Fed on May 4, 2022, the real return (overnight target rate less the inflation rate) remains negative. A better alternative is private credit. Many private credit loans are variable rate at a spread above the overnight rate generating significantly higher returns. Will inflation go up or down causing the Fed to raise or lower interest rates? Private credit doesn’t care. With low volatility private credit, irrespective of current overnight interest rates, continues to generate a premium.
About Bond Capital Bond Capital is an award-winning private credit fund. As a direct lender, Bond Capital provides advice and money across the entire risk curve. Bond Capital structured credit financing enables business owners to maintain control ownership in exchange for yield and capital preservation. Across multiple cycles and for nearly 20 years, Bond Capital has advanced secured investment quality credit to lower middle market companies throughout North America.