Dennis Gartman says it is a mistake for investors to buy bonds, and likely will be for the next 20 years.
Gartman, publisher of the popular The Gartman Letter, made the case at the 2017 Inside Fixed Income Conference in Newport Beach, Calif. on Thursday in a lively debate with Sage Advisory Services President and Chief Investment Officer Robert Smith.
“The end of the bull market in bonds came in October last year,” he said. “Rates have been rising for over a year now. Volume is coming on the down side. That is a material difference.” Yields rise when bond prices fall.
“Clearly I don’t want to own the longer end of the curve,” he said. “You will not want to own it for many years in the future. Probably two decades.”
Sage’s Smith said the “winter is coming” argument for bonds has been repeatedly voiced for several years, yet rates remain low across the spectrum of fixed income.
“Fixed income as an asset class is an exceptional diversifier or risk,” he said, pointing out that the worst drawdowns in fixed income pale in comparison to worst drawdowns in equities.
Bond bears don’t fully appreciate the support the fixed income market has, he said, among investors looking for coupons, not mark-to-market returns. “Most people will go to bonds to annuitize income,” he said. “How can you predict income generation from equities? Banks, pension plans.... All will support the fixed income market.”
When the bull market for equities comes to an end, “fixed income will at that time come in as the great diversifier,” he said.
“We will get a material bear market in equities in the next three years,” Gartman agreed. “And you will wish you went to hide in the bond market for some small amount of time.”
But “at this point in time ... I’m not paying attention to the diversification element. Do I want to own bonds now? The answer is no.”
Both agreed that using the standard benchmarks and taking a passive approach to fixed income is a mistake.
“Passive fixed income ETFs will hurt you going forward. You have to disaggregate the AGG,” he said, referring to the Barclay’s U.S. Aggregate Bond Index.
There will be positive return to bonds over the next three years, Smith said. “But tactical adjustments are important. You don’t run away from fixed income because you have a Treasury bogeyman. There is a boatload of opportunity.”
Smith suggested bank loans and preferred stocks in the financial sector were good bets in the fixed income space currently. “If you are long financial equities, why not be long financial preferreds?”