Treasuries are NOT Trash
$S&P 500(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$ $NASDAQ 100(NDX)$ $Invesco QQQ(QQQ)$ $Dow Jones(.DJI)$
Similar to what we saw with investor allocations to cash probing the lows, investors in aggregate are running record low allocations to treasuries.
You can see why in the chart below, with stocks having had a dream run while bonds have had a disastrous run. But you can also see something else in this chart. Both series look cyclical —one is in the middle of an upcycle, the other in the middle of a downcycle, and the next steps seem logical.
The key takeaway is that investors are heavily underexposed to bonds in general but especially treasuries. Bonds had a bad run since 2020, and this has lead some people to incorrectly assert that bonds are no longer a good diversifier —but what they miss is that 2022 for instance was an inflation shock, bonds never perform well in an inflation shock (and investors need to use commodities for defense in that situation).
Rather bonds do well during deflationary downturns, situations where economic activity declines, inflation shrinks (or even tips into deflation), and the Fed takes rates lower and expands the balance sheet. In those environments investors sell risk assets and buy defensives like bonds… often when it is too late. I would suggest looking at gradually building exposure to bonds at the cost of stocks (e.g. putting new money into a bond allocation, and thinking about rebalancing profits from risk assets).
And one last thing, AI might well be a key swing factor here. Eventually the AI capex boom will turn to bust (and that will dampen economic growth), but also as AI adoption increases the deflationary effects will be felt. If you get those two things happening at the same time it could be a recipe for strong returns for bonds.
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