It is difficult to convince yourself that if things are going a certain way they will not continue down the same path indefinitely. While deep down we know this isn’t the case, it is sometimes hard for the rational part of our brain to convince the irrational, trend following part of our brain that things will change. If your favorite team is on a 10-game winning streak, it seems like a given that they are going to win their next game. If you drive through seven stoplights on your commute home from work and hit a red light at the first six, you’ll probably start subconsciously tapping your breaks as you approach the seventh. If you’re playing blackjack and the dealer busts five times in a row, you’re probably going to go into the next hand with a little more confidence than you probably should. The trend likely has too much sway over what should be our rational thinking. Your team could lose the next game, the seventh light could stay green, and the house still has the advantage, yet we “feel” like none of these things are likely.
The trend right now in fixed income is higher and higher rates. It “feels” like rates are going to keep going up forever even though rationally we know that the current trend is not sustainable. Every time yields are trending higher like they are right now, there are a few things that are almost a certainty. One is that no matter how high yields are, you will always be able to find someone making an argument that yields are going to continue higher. Another is that some investors are going to try to time the market and wait for the absolute peak in interest rates before investing. The third thing that inevitably follows #2 is that many of these would-be market timers are left upset with themselves because they missed the peak and yields are now heading back lower. That’s the difficult thing about trying to invest at the “best” moment, you likely don’t know what the “best” moment to invest was until it’s behind you.
To put a picture around this idea, the graph below shows the 5-year Treasury yield for the past 20 years. As the green arrows highlight, we have been through a fair number of “yields are trending higher” markets over this timeframe. In every one of those timeframes, there were undoubtedly investors trying to time the market and invest at the absolute peak in yields, who ended up missing the boat because their crystal ball was broken and it turned out that yields can trend both higher and lower. The red arrows remind us that this trend can change quickly.
