The Role Of Bond Funds In A Global Macro Strategy

Many investors feel like bond funds are only to be used in the traditional 60/40 stock bond allocation mix.  They look at them as long term investments that are slow moving and really are a buy and hold affair.  While you definitely can do this there are many uses for bond funds and in some instances buy and hold is definitely and obviously detrimental to your investment results.

So why would you invest in bonds at all if they are boring and slow moving?  Fist of all you never want to invest or not invest based on the excitement you get form an investment.  If you are excited then take a step back and reevaluate your decisions.  We are investing and not gambling.  Second is that a slow moving asset class is a great thing as long as it is moving in your direction.  Slow, steady, and profitable is way better than fast and reckless.

Another hugely important reason to be investing in bonds is due to their diversification properties.  The aforementioned 60/40 stock bond mix is a great way to lose a slight fraction of your returns in exchange for a huge reduction in portfolio volatility.  Yes, you lose a bit with the bonds over time but you have a much higher chance of seeing stable and therefore easy to stick with returns then if you did and all stock portfolio.

We mentioned earlier that buy and hold is not a great idea in bond land and that common sense can do wonders for you in your bond investing.  So what should you do?  Well one of the better things to be aware of when making investment decisions is the attitude of the Fed, if they are raising rates then you dont want to be buying bonds.  On the other hand if they are lowering rates you do.  Basic bonds 101 will tell you that as yields rise bonds go down and when yields drop bonds go up.  If this is the case we want to be long when yields are dropping and out of the market when yields are climbing.  This may sound hard but in order to outperform buy and hold it is really not that hard.  Yes, you will be wrong sometimes but a simple trend following approach with bonds or bond yields will give you decent to excellent returns.

So how does all this fit in with a global macro strategy?  Well global macro is one of the most flexible investment styles in existence.  In fact it is probably the most flexible.  And as we know it has also been the most successful.  Global macro prides itself on going where the best risk to reward trades are and as a result a lot of the money made is in the bond market.  The Fed rarely if ever raises then lowers then raises rates.  Instead it is more of a raise raise raise raise raise lower lower lower lower lower lower thing.  Effective monetary policy mandates smooth and consistent applications of interest rate policy and not jerky changes.

Global macro will step away when interest rates are rising and load the boat when they are dropping.  in fact there are other rules that are relatively simple that you can apply to other asset classes as well that will put you in good stead with the markets and more importantly your portfolio results.