2022 Taught Investors the Wrong Lesson About Bonds

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The analysis compares the performance of the iShares 7-10 Year Treasury Bond ETF (IEF) and the iShares 0-3 Month Treasury Bond ETF (SGOV) during down stock market years, specifically focusing on 2008, 2000-2002, and 2022. Historical data from 1928-2025 indicates that in 21 out of 26 down stock years, 10-year treasuries had positive returns, while in 5 years, both stocks and 10-year treasuries had negative returns. The year 2022 is highlighted as an outlier, with both stocks (-18.04%) and 10-year treasuries (-17.83%) experiencing significant losses, suggesting a broken relationship or a unique market environment. The presenter's rule involves monitoring the yield curve and momentum signals for short-term treasuries (3-month T-bills) to decide between holding intermediate-duration bonds (like IEF) or short-term bonds (like SGOV). Specifically, if the 3-month yield rises more than 10 basis points above the 10-year yield, or if the 3-month yield increases by more than 1 percentage point over three months, the signal suggests moving to short-duration bonds (SGOV). The analysis shows that in 2022, the momentum signal triggered, leading to a switch from IEF to SGOV, which resulted in a better outcome (-9.03% for the rule path vs. -15.16% for holding IEF all year). The current environment (4.63% yield on 10-year treasuries vs. 3.71% on 3-month treasuries) shows an inverted yield curve and strong short-term yield momentum, suggesting a continued preference for short-duration bonds over intermediate ones due to higher rates and the potential for price depreciation in longer-duration bonds.

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