John De Goey says Canadian portfolios should diversify from what has historically been the safest asset available
US bonds have historically been seen as safe havens for investors during periods of market volatility. But a combination of US President Donald Trump’s erratic trade policy, the selling of US bonds by foreign governments and central banks grappling with the dual issues of stagflation and a likely recession should make investors rethink their US bond weighting, according to John De Goey.
The US bond market fluctuated greatly over the month of April, with yields dropping to below four per cent before rising to just under 4.5 per cent in under a week, unprecedented swings that indicate a declining confidence in the US economy.
Given the seismic shift in the bonds market, De Goey suggests investors should be looking to drop their US bonds holdings to below 40 per cent. He argues that investors should be looking to ditch the 60-40 portfolio model and consider a 50-30-20 strategy, with 20 per cent in alternative investments. While he does not advocate for ditching all US bonds outright, De Goey argues that investors should be considering diverting their funds into assets with positive cash flows such as real estate, renewable energy, and music royalties.
“I would say that the argument for exposure to bonds is going down, and it should be less than 40 per cent for a traditional balanced portfolio,” said De Goey, portfolio manager at Designed Wealth Management. “I'm using some offer memorandum products that pay a regular cash flow based on music royalties ... Mortgages if you want an interest income. The real estate market is fairly robust, and I think that'll be fine.”
In recent months, foreign governments such as Canada, China and Japan have ditched large chunks of their US bonds, a trend which De Goey suggests will be used to combat Trump’s volatile trade policies. The selling off of US bonds from foreign governments should be an alarm bell for those with heavy US bond weighting in their portfolios according to De Goey, who says this is another sign that the bond market will remain uncertain.
“Government bonds are not perceived as being as safe as they once were,” he said. “Part of that is because I believe central banks and governments outside of the US will be using monetary policy as a lever to bring Trump's more draconian trade policy to heel.”
De Goey says that the combination of a looming recession and potentially damaging stagflation have caused the bond market to reach such a level of uncertainty, making predictions into the bond market’s future performance extremely difficult.
“It's very difficult to reliably predict what's going to happen in the bond market, because there are competing pressures, and the stakes are getting higher, and the pressures are getting greater,” he said. “The consequences are greater, and that just means that the bond market is riskier than it used to be.”
When market downturns have occurred in the past, the bond market has thrived as investors seek safety and stability. De Goey points to the stock market crash of 1987 along with the rate hikes of 2022 as examples of US bonds demonstrating their value, but says these examples are not applicable to today’s financial landscape. But US bond yields have fluctuated greatly since Trump began his global trade dispute, a sign for De Goey that the market is not the haven it once was.
“In 1987 when the stock market dropped over 20 per cent one day, 60-40 investors didn't lose nearly as much, because not only did they have 40 per cent that was not in the stock market, but there was a flight to quality. And the bond market rallied by eight or nine per cent in one day in 1987 because the stock market was crashing,” he said. “If the main reason for people holding bonds is to have an insulator so that they are protected when the stock market drops, I would say that that rationale has weakened.”
De Goey says there should be more emphasis on Trump’s geopolitical moves, which have inherently shaped his economic policies. According to De Goey, both aspects of Trump’s administration are leading to a proxy war that will shift the globe’s financial and geopolitical landscapes.
“We have an economic trade war. It is a proxy war without guns, but it is nonetheless, a clear war for geopolitical primacy,” he said. “That's happening right in front of our eyes.”
