Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

For regular SAA and TAA portfolios, the next re-balance will be on Monday, February 26, 2017. You can also find the re-balance calendar for 2017 on ‘Dashboard‘ page once you log in.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Please note that we now list the next re-balance date on every portfolio page.


In the previous newsletter, the 2017 return column of multi-asset tactical portfolios was erroneous. The corrected table should be as follows:

Portfolio Performance Comparison (as of 1/12/2018, all returns are dividend reinvested)

Ticker/Portfolio Name 2017 3Yr AR 5Yr AR 10Yr AR 15Yr AR Since 1/2/2001 Max Drawdown
P SMA 200d VFINX Total Return Bond As Cash Monthly 21.7% 11.9% 14.9% 13.7% 14% 12.7% 17.5%
P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds 22.2% 6.7% 9.8% 9.3% 13.4% 13.1% 17.2%
P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds Top 2 22.3% 4.0% 9.4% 8.8% 13.5% 13.3% 21.5%
VFINX (Vanguard 500 Index Investor) 21.7% 13.4% 15.8% 9.3% 9.7% 6.6% 55.5%

You can also read the corrected one here.

Several readers pointed out this. Thank you!

Where Are Bonds Heading?

The new year hasn’t been kind to bonds: while investors continue to chase stocks higher, bonds have been under a considerable pressure. In our opinion, bonds are now at a critical juncture that might signal a secular trend change.

First, let’s review recent interest rate actions.

Rates are rising

U.S. Treasurys

Annual Yield (%)
US 3-MO 1.455
US 2-YR 2.069
US 5-YR 2.453
US 10-YR 2.654
US 30-YR 2.915

We should clarify first that the Federal Reserve only directly influences short term interest rates. Anything that’s longer than three months is decided by market (participants). The other concept is that bond price is inversely related to its yield: when its yield rises, the price falls and vice versus.

The following chart compares the interest rates of 2-yr Treasury with 10-yr and 30-yr Treasurys for the past one year (as of 1/22/2018):

The yield of the 2 year Treasury bill has risen most, compared with the two long term 10 and 30 year bonds. What’s more, the yield of 10 year Treasury, a standard long term bond mostly watched by fixed income investors, has broken out from its long term downtrend:

So the interest rate of 10 year Treasury is the highest since early 2015. Currently, it’s 2.65% annual interest has been above what famous bond investor Bill Gross called as the key level to watch.

However, the yield of 30 year Treasury has risen much less dramatically, indicating investors still dont have a strong conviction on the future inflation pressure. This is reflected in their trend scores — the trend score of 20+ year Treasurys is still slightly positive:

 Fixed Income Assets Trend (as of 01/19/2018)

Description Symbol 1 Week 4 Weeks 13 Weeks 26 Weeks 52 Weeks Trend Score
Intermediate Treasury IEF -0.75% -1.19% -1.52% -2.09% 0.98% -0.91%
10-20Year Treasury TLH -0.92% -1.33% -1.72% -2.17% 1.58% -0.91%
Short Term Treasury SHY -0.04% -0.1% -0.3% -0.39% 0.18% -0.13%
US Total Bond BND -0.44% -0.65% -0.62% -0.29% 2.57% 0.11%
Intermediate Term Credit CIU -0.47% -0.46% -0.5% -0.16% 2.78% 0.24%
Long Term Credit LQD -0.88% -0.73% -0.33% 0.06% 3.26% 0.28%
20+ Year Treasury TLT -1.17% -1.37% 0.08% -0.66% 5.41% 0.46%
National Muni MUB -0.01% 0.03% -0.57% 0.13% 3.73% 0.66%
High Yield JNK -0.11% 0.52% 0.01% 1.31% 3.81% 1.11%
Emerging Mkt Bonds PCY -0.64% -0.31% -0.35% 1.26% 6.09% 1.21%
Long Term Muni VWLUX -0.09% 0.22% 0.21% 1.28% 5.73% 1.47%
High Yield Muni VWAHX 0.0% 0.24% 0.49% 2.05% 7.0% 1.96%
International Treasury BWX 0.35% 2.41% 3.64% 3.14% 11.45% 4.2%

From the table above, one can see that bonds are indeed under pressure. However, the downtrend has not been uniform yet: trend scores of many segments are still positive.

High yield and international bonds

From the above table, one can also see that the trend scores of most ‘risky’ bonds are still positive. These include high yield bonds, high yield municipal bonds and foreign bonds. Looking at the spread between high yield bond yields and Treasury bonds, the following chart shows it’s still very tight:

In fact, it’s still trending down. What this means is that high yield bond yields haven’t risen much recently while the yields of Treasury bonds have risen, driving down the spread (difference) between the yields.

The tight high yield bond yield spread indicates investors are very much complacent (comfortable) with current high yield bond yields. This usually occurs when they are chasing risk assets and they are still not very concerned about the impact of rising rates on business.

Similarly,  international and emerging market bonds are still showing reasonable strength, again conforming with the risk appetite.

To summarize, we see bonds are at a critical juncture that might soon affirmatively signal the end of the current long term bond market. However, at the moment, we are still in the process to see a broad base confirmation.

What to do

First, stay the course. In the current environment, active strategies such as the fund selection strategy embedded in MyPlanIQ’s Tactical Asset Allocation(TAA) or in total return bond fund portfolios will be more effective to prevent from a large loss if indeed a bear market is finally in place. A bear market is a process and we should closely follow our strategies instead of making subjective and impulsive guess on the direction of bond markets.

Even in a ‘big bad’ bear market, as we stated in many of our newsletters, it’s still possible to derive reasonable positive returns in such a period. See for example, the following articles:

Furthermore, in such a bear market, there will be some bond segments that can still show positive trends (just as right now, corporate bonds and foreign bonds are still positive). The active strategy that rotates among high quality total return bond funds can hopefully still take advantage of funds that happen to have positioned better than the others in a period. As a last resort, if everything is solidly in a downtrend,  cash or ultra short term bonds can be used to temporarily avoid a big loss.

Market Overview

Investors are chasing stocks like the sky is the limit: stock indexes have consistently making historical highs day after day. However, besides elevated valuation levels and political dysfunction in the congress and the administration, there are several negative undercurrents: 1. negative bond trend as discussed above. Eventually, higher rates raises borrowing cost and they will have negative impact on stocks. 2. rate sensitive assets such as utilities and REITs are actually under pressure. 3. Factset S&P 500 companies earnings tracking for Q4 2017 so far hasn’t been encouraging: blended earnings was -0.2% compared with the expected 10.8% on December 31, 2017, though it’s still too early as only 11% of these 500 companies reported results by last Friday. At any rate, we will take what markets give to us and stay the course and manage risk accordingly.

For more detailed asset trend scores, please refer to 360° Market Overview

Now that the Trump administration has been in the office for more than a year, the economy and financial markets are in general still in a good shape. Whether the economy will continue to benefit from the supposedly trickle down of the tax cut, the deregulation and the promised infrastructure spending remains to be seen.  On the other hand, stocks continued to ascend, regardless of the progress. Looking ahead, however, we remain convinced that markets will experience more volatilities at some point when reality finally sets in. 

In terms of investments, U.S. stock valuation is at a historically high level. It is thus not a good time to take excessive risk. However, we remain optimistic on U.S. economy in the long term and believe much better investment opportunities will arise in the future. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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