Bonds Are Back In Action, And This Time It’s Personal

Bonds Are Back In Action, And This Time It’s Personal
Jonathan Hobbs

over 1 year ago2 mins

The yield on 10-year US government bonds has just confirmed the classic “head and shoulders” pattern – a favorite of technical analysts everywhere. When you see this pattern out in the wild, you can typically expect a continued decline after the second shoulder. So if this head and shoulders plays by the rules, you can expect the 10-year yield to keep slipping over the next few months.

Even if you’re not a technical analysis evangelist, this pattern makes sense. After all, investors tend to buy into US government bonds – a relatively low-risk asset – when they’re worried about the state of the economy. That pushes their prices up and their yields (which move inversely) down. That’s what you’re seeing play out in the chart above: investors have become nervous about an impending downturn in the last few months, and they’ve increasingly bought up bonds as a result.

There’s something else we can learn from this behavior too: investors seem to be more optimistic that the Federal Reserve will get a handle on inflation. See, high inflation is a bond investor’s worst enemy, making the value of their future interest payments worth less. So if they’re going all in on bonds, they’re clearly feeling confident that inflation will come down and that bonds will be a more viable investment.

There are no guarantees they’re right, of course. But it might not matter: what matters is that they’re all doing the same thing at the same time, and you have a chance to get in while yields are still relatively high and prices relatively low. And there are a couple of exchange-traded funds you can invest in to do just that, including the Vanguard Intermediate-Term Treasury Index Fund ETF (VGIT, expense ratio 0.04%) and the Vanguard Long-Term Treasury Index Fund ETF (VGLT, 0.04%).

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