Long-term bonds offer attractive returns after the end of a monetary tightening cycle

In view of the advanced stage of the monetary and economic cycle, we currently consider high-quality government and corporate bonds with longer maturities to be an attractive investment opportunity. 

History has taught us that these issuers have been able to generate significant excess returns after the last interest rate hike by central banks. For example, over the last seven Federal Reserve rate hike cycles, long-term US Treasury bonds have returned an average of 12.2% in each of the six months following the last rate hike. At a closer look, this fact should not come as much of a surprise: At the end of a monetary tightening cycle, bonds offer high coupons as well as the potential for price gains if late-cycle growth concerns in financial markets cause bond yields to fall.

As discussed in the associated edition of our Market Compass publication (download PDF to the right or below), we believe that the rate hike cycle in the US is likely to be over. Only an overly strong comeback of inflation might prompt the Federal Reserve to raise interest rates again – but overall, we consider the chances of such a scenario to be rather low.

At Tramondo, we evaluate the monetary policy cycle very closely in order to draw conclusions about the performance of different market segments. In this context, it is amazing how historical patterns, some of which played out on the financial markets several decades ago, can also be found in current data. 

Accordingly, in the context of tactical asset allocation, we always try to incorporate empirical data analyses into our decision-making process. There is no doubt that historical correlations cannot always be applied to a given financial market constellation, but empirical patterns help us to better quantify the probability of success of our investment decisions. 

Or as the American writer Mark Twain once aptly put it: “History does not repeat, but it often rhymes”.