“Year of the Bond”. This could be what 2019 goes down as unless we see a reversal in the unrelenting uptrend in treasuries and investment-grade credit. Government bonds across developed economies in the EU, and also Japan, have been negative yielding for some time now. However August 2019 saw positive momentum in US treasuries pick up substantially. Parts of the yield curve are negative in the US, but the uptrend in price doesn’t seem to pause. Our asset allocation policy is essentially a trend follower, thus our overweight in fixed income has yielded good results this year. We are up 2.4% in August alone, that too when our equity heavy benchmark fell -1.73%. Simplicity is key for us. We follow our allocation rules and let the trends play out. This year it’s been US treasury and credit ETFs, next year it could be another asset class. For now, we hold our overweights to (US) fixed income however we have added some short term US treasury ETFs as a holding, in effect cutting some duration risk. We reduced our Gold, Real estate and Equities positions. With recession calls getting louder – and some economies technically showing recessionary metrics (Germany) – we feel comfortable holding a portfolio that will benefit from monetary stimulus and defend against equity beta downturns.


August 2019 Momentum and Volatility scores for the Passive Allocator Universe


Daily Chart of IEF- iShares 7-10 Year Treasury Bond ETF.

2019 has been one upward grind for US treasuries. Trends tend to be self-fulfilling and dynamic, all characteristics being displayed by this asset class right now. Although, we could see some consolidation at these levels for sure. August’s move has been parabolic which is not exactly a healthy sign.


German GDP Quarter on Quarter

The latest reading for German GDP was slightly negative at – 0.1%. However, analysts are forecasting another – 0.25% reading for the current period, which would technically be a recession for the EU’s core economy. How much more firepower does the ECB have to support the EU economy? Afterall trade tensions are the primary reason for Germany’s export oriented economy…


Global GDP Growth

It’s not just Germany. Our world is still flat despite Trump’s efforts to create trade barriers and thereby some diversification in economic outcomes for different countries. For now though, correlations are high, and global GDP growth seems to be moving downwards in sync. All this economic doom means one thing – more stimulus. The political climate won’t allow austerity anywhere, in fact, loose monetary policy seems the norm now. Until inflation pops in (it may take a while), we do feel the uptrend in bond prices – at least in US bonds – is intact.

Happy Investing
PA fund team