(Bond) regime change

It’s increasingly difficult to understand the status of the Iranian conflict. Just when you think both parties are close to reaching an agreement, there’s more bombing. And the situation changes, literally, by the hour. We’re in the latest 48h Trump ultimatum that coincides with the prior 10 day warning he published 10 days ago. But at the same time they seem to be negotiating a truce. Brent oil is down so far today, which means the market thinks the talks are real. But investors also have another problem: bonds are not working the way the used to when it comes to absorbing shocks or functioning as save havens. In the top chart below you can see that 10 year government yields have gone up since the beggining of the conflict with the exception of the Chinese bond. That means higher borrowing costs, but it also means investors can’t hide there. But there’s more. This is not a phenomenon related to the conflict. In the bottom chart you can see that after the inflation shock from Covid, US treasury bonds entered a regime change where correlations became positive with stocks after 2021. That means your balanced portfolio will not function as well as it used to, in this environment. You might need to introduce commodities or liquid Alts to diversify. It’s ironic that the regime change that allegedly the U.S. was looking for Iran is not happening (at least so far) and the one they didn’t want, in the bond market, is the one that materialized.

Want to know more? You can register for free at Fund@mental.

#iamfundamental #soyfundamental #wealthmanagement #familyoffice #financialadvisor #financialplanning #policymistake #ratecut #stagflation