Bond Market Wisdom from Hawaii’s Nest Egg Guru
As much as the investing public loves to follow the stock market, the bond market is often where all of the action is, and that certainly has been the case lately as the inflationary impact of the war with Iran and a growing sense that the $40 trillion national debt has set off global alarm bells that maybe that amount of debt is just too much. It’s difficult to say which factor is pushing rates higher – I tend to think it ultimately is the size of the national debt that is weighing most heavily, but either way, yields on the 10-year and 30-year treasuries are at their highest since 2007.
That’s terrible news if you are looking to borrow money – for example, to buy a house – but it is good news if you are looking to finally earns some interest on your savings.
On that score, I often talk about how dynamic bond laddering is one of the elements that sets financial planning Hawaii’s portfolio management style apart. By that I mean when interest rates are low, we keep our bond and CD maturities short – or, as we were doing earlier in the year – we park maturing bonds and CDs in entirely in money market funds in order to wait for interest rates to rise. When interest rates are rising or are high we extend the maturities out as far as 5-7 years – long enough to capture much of the long-term bond yield but short enough minimize price volatility if rates continue to rise.
Here’s is our dynamic laddering position now – I am comfortable extending maturities out as far as 5 years to capture 5% treasury or CD yields, but I am keeping the ladders weighted to shorter maturities because I believe there is a real possibility that rates may rise still higher from here.
In terms of how NOT to invest in bonds, my sense is that most investors do not fully appreciate just how volatile bond prices can be. Last week, a client called to express his excitement over a 20-year municipal bond that now has a 5% yield maturity. The bond would be state and federal tax free for him. However, as compelling at that tax-free yield may be, I pointed out that a similar 20-year municipal bond that was issued at par with a 2%+ yield to maturity in 2021 is now trading down about 30% from its issue price with no downgrade it is bond rating!
This is why I am always harping on this topic and urging clients not to extend maturities to reach for yield. In my view, 20-years is too long to wait to get your principal back. Enduring a 30% decline in your bond price is like taking all the volatility risk of the stock market without the potential reward.
Speaking of bad investments – I often use the Vanguard Intermediate and Long Term bond funds as proxies for the bond market and to illustrate why I always say “Friends don’t let friends buy bond funds.” As of today – October 2, 2026, the Vanguard Intermediate Bond Fund currently sports a 30-day SEC yield of 5.06% …and has a total year to date return -including interest earned to date of -2.71%.
The Vanguard long term bond Index fund Admiral Shares has an SEC yield of exactly 6.0%, but has a YTD total return of -6.69%.
I have been pretty vocal in expressing our position that bond mutual funds and ETFs have no place in most consumers portfolios. In my opinion, the “safe” or “conservative” portion of consumer portfolios should be as close to risk free as possible, and bond funds just can’t deliver that stability.
As for borrowers, mortgage rates are now in the 7%+ range for 15 and 30-year fixed rate mortgages. These rates are causing major sticker shock to an entire generation of home buyers. One of the very few benefits of being much older is that we recognize that the rate environment through most of the first 25 years of the 21st century is a historical anomaly. Mortgage rates for most of the last century and the first half dozen years of this one were considerably higher. For context, the current level of mortgage rates – as well as the yields on 10- and 30-yer treasuries – are now in the lower to middle of the historical norm.
None of this, however, offers any solace to prospective new home buyers, who are learning from the mortgage math that a 2 percent rise in mortgage rates may price them out of the housing market. Home sellers are naturally finding that the market of potential buyers is drying up. Many will likely hold firm on their prices for a while, but if interest rates remain high, it is hard to see a way around housing prices falling.
I just got back from a conference in Austin, Texas where housing prices have already fallen an incredible 25-40% depending on the neighborhood. Austin probably represents an extreme example, but it is hard to imagine other housing markets not facing similar downward pricing pressure. The misguided notion that everyone should buy a house and the adage that home ownership is always a great investment have been exposed. Real estate is a risk asset just as the stock market is.
That’s all the cheery bond market news I have for today. Please check out the rates in this month’s issue of Financial Planning Hawaii Yield shopper. Please also read the timely article I just wrote on building bond ladders with Treasury zeros.