Bloomberg US Aggregate Bond Index

That is exactly what just happened to the U.S.

Aggregate Bond Index, the bedrock of conservative investing, the thing you were supposed to build your retirement on.

It just fractured.

Yeah, it forces a complete recalibration for everyone.

I want to start with the data here because it is a massive wake-up call.

The source tracks the Bloomberg U.S.

Aggregate Bond Index, noting a severe drawdown of roughly 2.8%.

Which sounds small if you're used to stocks.

Um, really a long, you know, bear mount- market so far for the, you know, fixed income market.

Uh, the sixth year of a bear market according to the US, uh, Bloomberg Aggregate Bond Index, which, uh, peaked in August of 2020, and, um, you know, hasn't recovered since then.

So much higher interest rates.

That's one of the big things leaning on stocks and making it difficult for, uh, most stocks to climb, um, even though you're seeing some, you know, optimism among the, the Mag Seven and the, you know, technology companies with rapid growth in AI.

But bond yields on, uh, the, the 10-year Treasury and the long bond are up by about 45 basis points in the last month.

And so we've seen bond returns on sort of like the, the Bloomberg Aggregate Index go from pretty, you know, okay, kind of like zero types of returns or maybe negative a half or something, now down to about negative three and a half, uh, on, on, uh, investment-grade bonds, which is really putting pressure, not surprisingly, on the valuations of equities.

The S-S&P 500 as of June-- as of July 31st, the most recent number I have, had a CAPE ratio of forty-two point zero four, which is one of the highest of all time.

And with rising interest rates, that CAPE ratio becomes more and more challenged to sustain.

So the outperformance we saw from international markets went away last week for sure.

In the bond market, We saw the aggregate bond index, which is sort of the S&P 500 of the bond world, trade fractionally lower from a price perspective, which means yields were higher.

Remember that bond prices and bond yields have an inverse relationship, just like your house.

So as interest rates go up, your house price is going to go down, while as interest rates go up, bond prices go down.

And the longer duration bonds you own in your portfolio, the more interest rate sensitive they are, meaning the price is going to go down more.

So I'll try to explain that in a little bit more detail.

The Bloomberg Aggregate Bond Index, which is sort of the S&P 500 of the bond world.

It's an index that tracks over a thousand bonds and bonds.

I think that's the most obvious one and the easiest one to discuss these.

And so on the passive side, the indexing side, we're talking about index ETFs that would track something like the Bloomberg Aggregate Index, right? Broad bond market exposure index.

Or at least that's what it's trying to do.

It's trying to the best of its abilities.

So it's a lot better than buying a T-bill.

And then the last one is Deflex, my flexible fund, which has an interesting dual mandate that we've actually succeeded at 1, 3, 5, 10, and since inception, we're trying to beat cash and the Bloomberg Bond Index.

And when you have volatile markets, which we've had over the past 14 years, it's no small trick to be able to do that.

But it's my favorite fund to manage because you have so many moving parts to it, trying to outperform cash and a six-year duration benchmark.

Most of the time what we see if you're working with a financial planner or if you're DIYing your investments, you're probably just gonna get an average bond out there.

And so many people know of Vanguard's Bond Aggregate Index called BND.

And so that's what a lot of people think of as a benchmark for bond investing.

Now I'm personally gonna share why I don't necessarily think this is the best option.

It has been more of a global phenomenon.

Talk, though, even within the U.S., and when you think about the Bloomberg Aggregate Index or whatever your benchmark is, are there sectors that you'd be rotating into because they're either more or less attractive? I look at credit spreads right now, and even though...

For some names who have been issuing quite a lot, the hyperscalers and the like, they've, you know, their spreads have widened a little bit.

But in aggregate spreads, corporate spreads are very tight.