2024-03-08 04:45:28 ET
Summary
- In January, I had a neutral outlook on the BND bond index ETF, assuming that inflation and interest rates would stabilize at a combined 4-5% level.
- As noted in January, a spike in services inflation would trigger a negative revision in my view due to the risk that US interest rates will remain above sustainable levels.
- Since then, service CPI inflation has shot up to ~8%, implying a potential broader rebound in inflation that will halt interest rate reductions.
- Without rate cuts, the US debt may quickly accelerate, triggering the need for even higher inflation to reduce the real debt burden.
- Although BND's total nominal risk is low, it is high if we assume the value of paper money will decline significantly over the next eight years.
Over recent years, I've continually traded the extensive bond index ETF, Vanguard Total Bond Market Index Fund ( BND ), which primarily owns longer-term US government bonds, with around a third of them exposed to investment-grade corporate bonds. I had a consistently bearish outlook from 2020 through 2023. In January, I published " BND: The 2024 Bond Market Should Be Quiet Unless Another Straw Hits The Camel," upgrading my outlook to neutral, assuming that bond prices would stabilize with normalizing inflation. BND's price has been nearly unchanged since then, currently ~50 bps lower....
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BND: Avoid Bonds As Service Inflation Rebounds To 8%