Bond Report: How to Navigate the Bond Market During an Inflationary Cycle

Inflationary cycles can challenge even the most seasoned investors. Stephen Weitzel, Managing Partner at Reveille Wealth, sat down with Jason Perz on Bond Report by All Star Charts Premium to unpack how inflation is reshaping the bond market, bond yields, and long-held investor assumptions about U.S. Treasuries. Click the image below to watch or continue reading for a summary.

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The Bond Market's Pavlovian Past

Stephen Weitzel uses a simple metaphor to describe the bond market: Pavlov's new dog. Investors have been conditioned over the last 40 years to expect bond prices to rise as interest rates declined from their peak in the early 1980s. Bonds were seen as a reliable way to de-risk portfolios and generate income. This behavior became instinctual, much like Pavlov's dog salivating at the sound of a bell.

But what happens when the bell rings and no food arrives? The bond market in 2022 offered a glimpse: significant underperformance and a clear signal that the old rules may no longer apply.

Reassessing the 60/40 Portfolio

Despite the bond market's struggles from 2020 through 2024, the traditional 60/40 portfolio still holds sway in many corners of the investment world. Weitzel acknowledges that while fixed income performed well from late 2023 into 2024, it's no guarantee of future success.

Some firms are pivoting toward alternative investments, often proprietary products, to replicate what bonds used to offer: stable, uncorrelated income. However, many of these alternatives lack a proven track record in true bear markets, and some, like private REITs, have revealed liquidity risks during market stress.

Inflation's Sticky Challenge

Both Perz and Weitzel agree: inflation is likely to remain sticky. That changes the game for bonds. Historically, rising inflation erodes bond values and boosts bond yields. In this environment, long-held positions in U.S. Treasuries may no longer serve as the "safe haven" they once were.

Case in point: after recent Fed rate cuts, long-term bond yields unexpectedly climbed. This signals a market that doesn't believe inflation is tamed or that the Federal Reserve can act without fiscal consequences, especially with national debt surpassing $37 trillion.

Strategic Shifts: Where Investors Should Look

So, where should investors focus during an inflationary cycle?

• Small-cap and value stock sectors tend to outperform during rising-rate environments.

• International and emerging markets are often under-owned and undervalued. These markets may benefit as capital rotates out of U.S. large-cap growth.

• Commodities and real assets—like energy, industrials, and materials—often shine when inflation is high.

Forward returns are often driven by starting valuations. Many domestic large caps are richly priced, while alternatives like international equities and small caps offer compelling entry points.

Tactical Bond Management is Key

The lesson? Bonds are not dead, but they can't be managed passively. Investors must adopt a tactical approach, taking advantage of countertrend rallies in bond prices and avoiding long-term exposure when yields are climbing. Active management, not static allocation, is essential to navigating the bond market moving forward.

Whether you're nearing retirement or simply looking to hedge against inflation, now is the time to find a financial advisor to adjust your portfolio strategy to the changing bond market. Contact Reveille Wealth to ensure your investment strategy is aligned with today’s economic realities.

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Material prepared partially by Arm Communicators, LLC, and independent third-party.

Any opinions are those of Reveille Wealth Management and not necessarily those of Raymond James. Expressions of opinions are as of this date and are subject to change without notice. Raymond James and its advisors do no offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.