The financial press has found its story du jour: “The Death of the Safe Haven: How to Fix Your Bond Strategy as Yields Rise.”
Nothing sells quite like fear (even though bond yields are indeed scary stuff at the moment!). But it’s worth remembering that the press is incentivized by clicks and engagement… hence the fear-mongering headlines.
We at CDI look at the rise in yields as a normal reaction to the factors Fed Chair Kevin Warsh outlined in his Jackson Hole speech:
So, what should investors do?
It’s a boring answer, but it bears repeating here: check your asset allocations between equities and fixed income to ensure they’re age appropriate (and within the investor’s personnel risk tolerances).
I like to use Jack Bogle’s back of the napkin formula as a starting point (you can’t spend 20 years at Vanguard and not have some things wear off after all).
The original formula was 100 minus the investor’s age.
“For decades, investors have relied on this simple formula for basic asset allocation guidance. Using 100 as a starting point effectively means targeting a bond weighing equivalent to your age, with the remainder in stocks. This guideline is based on the notion that younger individuals can afford to take on more investment risk because of their longer time horizons. As investors get older, their time horizons shorten, making an increasing fixed-income allocation more prudent.”
That has changed as life expectancies have risen. The new napkin math is 120 minus the investors age; that’s nominally what an investor’s baseline equity exposure ought to be (if you subscribe to this line of thinking).
“More recently, 120 has been showing up as a more common starting point, partly because average life expectancies have gradually increased. Before his death, Vanguard founder John Bogle advocated using 120 minus one’s age to determine equity allocations, explaining that the previous guideline came to fruition in an era of much higher bond yields.”
I think that’s a pretty good rule of thumb.
Once you apply this rule, step two is another line from Bogle: “Stay the course.” (Some mentors and lessons really stick with you).
CDI believes an investor’s fixed income portfolio should have a portion of its allocation in short-term, highly liquid assets for emergencies (think money market funds or equivalent wrapper).
We typically allocate the rest into an actively laddered wrapper. The duration of that wrapper is based on many individual factors. Given the current environment, we think that wrapper should have a significant allocation to the shorter end of its investment universe.
CDI uses three measures to determine our duration targets and maturity allocations. The overall philosophy is simple, though: we want to be paid to take risk (whether its duration risk or credit risk).
Our measures are:
CDI uses these measures for all the markets we participate in, but for the sake of brevity, we’ll continue using the Treasury market for illustrative purposes.
1) Real yields:
The following table depicts the real yields of several Treasury tenors across the yield curve. The Yield levels are based on the close of business 9/2/2026 and the last core PCE reading:
2) Slope of the yield curve
For this measure we’ll use the promise yield differential between a two-year and ten-year Treasury security.
The current spread in promised yield is 0.40%. The long-term average is 0.95%. This measure is -0.59 standard deviations off its long-term average (as CDI calculates it). What does this mean in English? The yield curve is flat and investors are getting paid well below average to buy longer maturities.
3) Relative value of securities within their market
If an investor took the yield of a five-year Treasury security and divided it by the yield of a ten-year Treasury security right now, the ratio would be 94.8%. The long-term average of this relationship is 77.5% going back to 1991.
Again, to put this into plain English, an investor is earning 94.8% of the income of a ten-year Treasury security by buying a five-year Treasury security (and only taking on 56.3% of the duration risk). Quite a value!
Interest rates go up and interest rates go down. The current change in interest rates across the yield curve are nothing to be overly concerned about, especially if an investor has the proper asset allocation.
The best relative value, at least in our opinion, is on the shorter end of the maturity spectrum. A laddered portfolio structure takes advantage of rising yield because a portion of the portfolio matures each year and can be reinvested at higher yields.
Think of it as buying bonds on sale, and who among us doesn’t like a good sale!
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