Bonds are a disaster. Why you may want to buy more.

The bears are in control of the bond market. - Photo by El Dorado County Sheriff’s Office/AFP via Getty Images

During the great bond bubble of the past decade, many Wall Street salesmen liked to reassure their clients that they could still expect to earn around 6% a year from their bonds because that was the “historical average.”

By the time they were making these promises, the bonds themselves were so expensive that their yields, or interest rates, were often as low as 4% or even 3%.

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How advisers planned to squeeze 6% annual returns out of 4% or 3% bonds was a question left unanswered.

Maybe the salesmen were simply very bad at math? There are also less charitable explanations.

With the bond market now in freefall amid global panic about deficits and persistent inflation, their clients are counting the heavy cost. U.S. bonds have proven certificates of confiscation for nearly 17 years. According to an analysis I ran using Portfolio Visualizer, if you invested in U.S. bonds — for example using an index fund such as Vanguard Total Bond Index BND — between November 2008 and May 2022, and you reinvested all your interest payments, you would today have less money, after adjusting for inflation, than you did when you started.

This doesn’t even include the additional hefty deductions for taxes.

It is yet another rebuke for those who think that finance is a branch of the natural sciences, like physics, and that various investments and asset classes miraculously produce the same returns no matter the price you pay for them.

And it’s a cautionary tale for those who insist today that sky-high stock prices will produce much happier outcomes than the sky-high bond prices of the last decade.

But readers don’t come here to read about the past, and you can’t drive a car simply by looking in the rearview mirror. With bonds crashing worldwide, it’s almost impossible to avoid the obvious contrarian question.

At what point are they worth buying?

As it was foolish to buy them when they were expensive, when does it become smart to buy them when they are cheap? Or is this just another example of the famous Wall Street warning: Don’t try to catch a falling knife?

We will find out within about two weeks whether global fund managers have finally capitulated and fled the bond market. That will be a key data point in the next BofA Securities monthly global fund-manager survey.

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But here’s one indicator that is starting to flash green: It’s called the Bennett Rule.

This is named after my late friend Peter Bennett, a brilliant and successful money manager in London, who helped his small number of well-heeled clients beat the indexes over decades (even after charging them 1.5% a year in fees).

Bennett reckoned that a durable asset class was worth buying once it had fallen by about two-thirds from its peak. He argued that at that point the asset had fallen so far out of favor, and was so unloved among investors, that it was a buyer’s market. It might yet fall much further, of course. But if you bought it and held it for five years, he said, you had a very good chance of making excellent returns.

Long-term U.S. bonds are nearing this threshold now. For example the February 2050 zero-coupon U.S. Treasury bond (the Cusip is 912834VM7) is down to $28.52. In the COVID panic it touched $74. That’s just over a 60% drop. In May of this year it fell as low as $25, a 66% drop.

The yield is now 5.17%.

Zero-coupon bonds do not pay you coupons twice a year or even once. They just repay principal when they come due. You pay around $28 now and in February 2050 you collect $100.

The Pimco 25+ Year Zero Coupon U.S. Treasury Index ETF ZROZ, which owns a basket of these very long-dated U.S. Treasury bonds, fell to $62.83 on Tuesday. (It briefly touched $62.08 in May.) In 2020, during the depths of the COVID deflation panic and after a decade-plus of low interest rates, it touched $184. So it’s also down about two-thirds from the peak.

None of this, obviously, is scientific. Bonds could keep falling. And how. (During the final years of the great inflation in the late 1970s and early 1980s, the interest rate on 30-year Treasury bonds ranged from 7.5% to 15%. If such a thing happened this time, prices would collapse.)

But what could be the bullish case for bonds here? Has the U.S. government — or any other government, for that matter — suddenly found a way to balance its books? Or is it persisting with the massive unfunded tax cuts first passed in 2017 and reupped in July, combined with an inexorable rise in the costs of providing Social Security income and Medicare benefits to growing numbers of elderly people?

Nothing has turned bullish except perhaps the price.

That said, it is possible to see a bull-case scenario for long-term Treasury bonds. The economy is slowing. If President Donald Trump succeeds in his campaign to MAGA-tize the Federal Reserve, short-term interest rates will soon be slashed. In order to drive down Uncle Sam’s interest costs, he may soon pressure it to resume quantitative easing — buying long-term bonds — in order to drive down long-term costs as well. Some strategists think sooner or later the U.S. government will have to do this, in order to make its deficits affordable.

Meanwhile, artificial intelligence is deflationary — large numbers of workers will soon be laid off. And as bond managers Hoisington pointed out recently, tariffs are only inflationary in the short term. In due course, Trump’s tariffs — assuming he finds a way around the legal issues — will be deflationary, as tariffs were in the 1930s. When you impose sales taxes and drive up prices, people end up buying less. And when foreign countries retaliate, as they always have, your exports decline, too.

Then there’s this conundrum: If the bond market keeps tanking, sooner or later it will drag the stock market down with it. So if you are buying stocks right now you are also effectively betting that bond prices aren’t about to collapse. Only you are paying high prices, instead of lowish prices, for your bet.

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