Fixed income or DCA: 5.3% on US 10-year Treasury vs Brent at $102

Fixed income or sticking with DCA: the 5.3% 10-year Treasury yield vs Brent at $102

Is it time to move from equities to fixed income and retreat to winter quarters, or should you keep dollar-cost averaging until the end of days? The trigger for the question is a combination not seen in years: the MSCI World is down around 0.9%, the S&P 500 and the Nasdaq pull back after hitting all-time highs, and the US 10-year Treasury yield is hovering around 5.3%, levels not visited in a long time. On top of that, Brent has broken above $102 per barrel, bringing inflation risk back to the table. The doubt is no small matter: if CPI sticks at 4% and the bond pays 5.3%, the safe haven stops being a haven and becomes just another bet.

What the 5.3% 10-year yield means with Brent at $102

The first misconception worth clearing up is textbook stuff: buying sovereign debt now is not betting against the stock market, it is betting against inflation. They are different things and they get mixed up all the time. With oil above $102, the central scenario for many analysts is a CPI uptick, and a 5.3% coupon with 4% inflation leaves the investor with a real loss. That is not a safe haven, it is a deal with the devil, to put it bluntly.

Some argue that the US bond at these levels is a historic bargain and that recession will eventually force rate cuts that send its price soaring. Against that stands the opposite argument: if inflation becomes entrenched, the Fed does not cut, and the investor is left collecting a coupon that loses purchasing power every quarter. The debate, then, is not stocks versus bonds. It is inflation versus duration.

The correlation that broke, and nobody knows if it is back

The experience of recent years dismantles the classic playbook. Comparing portfolios with different profiles on automated management platforms, the recurring conclusion is uncomfortable: when there are gains, the all-equity portfolio wins far more, and when there are losses, both fall in similar fashion. It peine in 2020, it peine in 2022 with the war. Fixed income delivered little or outright losses.

The technical explanation is that the correlation between stocks and bonds broke with the return of inflation, and nobody knows whether that has changed back. In 2022 bonds lost more than in any crisis since the 1970s, which leaves the buffer argument in a delicate position. The full calculation, with both portfolios compared year by year, yields a difference that surprises anyone who still believes in the automatic safe haven.

Dollar money market funds, coupons, and the currency risk nobody prices in

The option gaining ground in the short term is dollar money market funds: a decent yield and no obligation to lock up capital for ten years. But it adds currency risk, and if the Fed cuts rates, the investor gets burned. In other words, you swap duration risk for exchange rate risk, which is hardly a free trade.

Another middle path being considered is buying specific bonds, collecting the coupons, and waiting for rates to fall to sell at a capital gain. It sounds reasonable until you remember that the Fed could raise rates late in the year and the ECB does not want to commit to anything. With that outlook, the wait could stretch longer than the coupon justifies.

The 2027 bank run scare and French debt: where the data ends and the narrative begins

In more turbulent territory, two concrete ghosts appear. The first is the possibility of a bank run like Argentina's, with a marked date: 2027. The second is French public debt, which from that same year would no longer count on ECB purchases, on top of the regulation passed during the pandemic. There is real substance in both matters, but also plenty of media noise in both directions: the ECB is not going to let Paris fall that easily, and equating the European situation with Argentina's is a leap the data does not support.

The conclusion, if there is one, is the usual one: nobody serious disputes the core globally indexed fund in accumulation mode with automatic contributions. The debate is what to do with the rest. And there, the people who have spent their lives selling bonds as a safe haven are the same ones who were flogging guaranteed funds in 2007. Nothing new under the sun.