Amid a global selloff, the right move might be to buy more bonds
Jan. 12, 2025 10:49 AM ET
By: Vansh Agarwal, SA News Editor
 Andrii Dodonov/iStock via Getty Images
This week's headlines were dominated by economic data that led to a recalibration of Federal Reserve interest rate cuts and a major selloff in bonds.
Even artificial intelligence news from the likes of Nvidia ( NVDA) and AMD ( AMD) found itself relegated to the sidelines as labor market and inflation indicators that an easing Fed does not want to see took center stage.
U.S. Treasury yields surged on Friday as investors sold off bonds after the latest jobs report came in hotter than expected and further supported a case for fewer Federal Reserve interest rate cuts.
Following the strong economic data recently and remarks from central bank speakers, the outlook for rate cuts has significantly changed. Traders now see the first cut this year in September.
Another major reason behind the rise in U.S. Treasury yields has also been the uncertainty and concerns over the policies of U.S. President-elect Donald Trump. Trump's promised tariffs might prove to be inflationary, and his promised tax cuts could further increase budget deficits.
The benchmark 10-year yield ( US10Y) rose as much as 10 basis points to 4.79% on Friday, approaching levels not seen since the end of October 2023. The 30-year yield ( US30Y) hit 5.00%, while the shorter-end 2-year yield ( US2Y) was up about 7 basis points.
The S&P 500 ( SP500) on Friday slipped 1.94% for the holiday-shortened week to end at 5,827.04 points, posting losses in two out of four sessions. The S&P 500 ( SP500) Technology sector was -3.10% for the week, with the Magnificent 7 club down -1.7%. Nvidia ( NVDA) shed -5.9%.
Worries over fiscal discipline are also not restricted to the U.S., with borrowing costs in France now above those of Greece, while gilt yields in the U.K. have been pushed to their highest levels since 2008.
Still the safe haven?
Investors are demanding larger premiums in response to the uncertainty. However, according to a report from the Wall Street Journal, bonds might prove to the safest place to invest amid the turmoil.
The Journal calls today's situation, where central banks have been able to increase interest rates without harming the economy, and then slowly slash them while sending hawkish messages, unprecedented.
The report attributes the stock market's negative reaction on Friday to stretched valuations. After years of technology-led rallies, the S&P 500's one-year forward earnings yield has fallen to 4.6%, equal to the yield of a 5-year Treasury, thus making bonds increasingly competitive with equities.
And if there was truly a threat to growth and corporate earnings, central banks would go into stimulus mode, which would end up benefiting bonds, the report added.
Here are the best Quant Rated government bond ETFs:
- Bondbloxx Bloomberg One Year Target Duration US Treasury ETF ( XONE) - Quant Rating: 3.13
- US Treasury 12 Month Bill ETF ( OBIL) - Quant Rating: 3.13
- Bondbloxx Bloomberg Two Year Target Duration US Treasury ETF ( XTWO) - Quant Rating: 2.98
- Jpmorgan Betabuilders U.S. Treasury Bond 1-3 Year ETF ( BBSB) - Quant Rating: 2.97
- Vanguard Short-Term Treasury Index Fund ETF Shares ( VGSH) - Quant Rating: 2.96
- SPDR® Portfolio Short Term Treasury ETF ( SPTS) - Quant Rating: 2.95
- US Treasury 2 Year Note ETF ( UTWO) - Quant Rating: 2.93
- iShares 1-3 Year Treasury Bond ETF ( SHY) - Quant Rating: 2.90
- Schwab Short-Term U.S. Treasury ETF™ ( SCHO) - Quant Rating: 2.90
- Franklin Short Duration U.S. Government ETF ( FTSD) - Quant Rating: 2.87
- Bondbloxx Bloomberg Three Year Target Duration US Treasury ETF ( XTRE) - Quant Rating: 2.87
- SoFi Enhanced Yield ETF ( THTA) - Quant Rating: 2.75
- US Treasury 3 Year Note ETF ( UTRE) - Quant Rating: 2.74
- First Trust Low Duration Opportunities ETF ( LMBS) - Quant Rating: 2.70
- iShares Agency Bond ETF ( AGZ) - Quant Rating: 2.61
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