Hedging Bonds Against a Bear Market
Why the Need to Use Inverse Bond ETFs to Hedge Fixed Income Exposure?
Fixed Income markets in the United States have enjoyed a 30 year bull market. Since then early 1980’s when Fed Chairman Paul Volcker ‘broke the back of inflation’ with a series of rate hikes that pushed interest rates to now unthinkable levels, investors of all kinds have rode the wave of the great bond bull market. Rates on the U.S. 10-year Treasury bonds have deflated from a high of 15% in 1981 to a low of 1.39% in June of 2012. With such a sustained increase in bond prices (lower yields) it’s no wonder investors have been drawn to this asset class. Consider hedging with inverse bond ETFs.
This is an area that was primarily an institutional market for years but with the advent of technology and securitization, access to fixed income products has reached the masses. Cookie-cutter diversification has been replicated by so many investors that its benefits are decreasing as correlations rise between fixed income and other asset classes.
You likely have fixed income exposure as part of an investment portfolio. A baby boomer or retiree may have an even higher 50/50 equity to fixed income split. An old adage we used to use was your age should be your fixed income percentage and the rest would be equity. The problem is, even at 50% you are very exposed to fixed income, maybe more than you realize. If you haven’t combed through your 401k fund’s holding recently, don’t worry we do, you might be surprised at what you find as fund compete against each other and total various benchmarks. You could have more emerging market junk debt than U.S. T-bills. Below is a list of inverse bond ETFs for different classes of bonds.