Here’s my recent interview with Oliver Renick on TD Ameritrade TV. We discussed my concept of bond escape velocity. You can watch the entire interview at this link or below, but the summary is this:

  • When interest rates get high enough bonds (and especially short duration bonds) achieve a certain level of escape velocity when their starting yield is higher than their duration and the interest rate risk is largely offset by the starting and average future yield.
  • In the current environment government bonds with durations under 5 are at or near escape velocity whereas bonds over 5 years in duration are still exposed to significant principal risk.
  • This all assumes the Fed isn’t on the verge of raising rates much more aggressively, but the implicit assumption here is that the huge move in rates from 2022 (moving from 0% to 5% in just a year) is unlikely to be repeated so future interest rate risk is diminishing.
  • What would upend this view? A double bump in inflation such as the 1940s or 1970s.
  • Long story short – this is an environment where short-term investors can feast at the trough of T-Bills and other shorter duration instruments just chomping on 5%+ yielding instruments all day long, but longer duration investors (including stock market and long-term bond investors) will continue to face a huge amount of uncertainty and volatility.

I hope you find this one helpful.