On Tuesday, May 15, 2018, the 10-year yield on U.S. Treasuries jumped above the 3% mark.  It settled the day just above 3.07%, which is the highest it has been since 2011.

The rest of the financial markets were spooked a bit, as stocks plunged, although not horribly.  After the last few months of extreme volatility, any day where the losses are less than 1% doesn’t seem like much.

Stocks and bonds weren’t the only assets to sell off.  Gold took a major hit, as the U.S. dollar rallied.  Gold had been trading in a fairly narrow range for a while between $1,300 and about $1,350.  Well, with the spike in the 10-year yield, gold plunged hard below the $1,300 barrier.

This was one of those days where all of the major asset classes were down.  A permanent portfolio did not save you on this one particular day.  The mutual fund PRPFX, which somewhat mimics the permanent portfolio setup, was down nearly 1% on the day.  There aren’t many days where the losses are bigger than that.

I find that when the permanent portfolio or PRPFX has a really bad day, there is usually a rally shortly thereafter.  All three asset classes are not likely to continue downward together.  At least one of the asset classes will bounce.

And that is really the main benefit of the permanent portfolio.  All of the asset classes are not highly correlated.  There are certain periods where there may be correlations, but typically at least one of them will do well.

The only time that the permanent portfolio struggles all the way around is in an environment of relatively low price inflation and slow economic growth (or outright recession).  But if we get a recession, then the long-term rates will likely reverse course and head downward again, thus driving bond prices higher.  This didn’t happen in the 1970s, but there was high price inflation at that time and gold did really well.

With the volatile stock market of the last few months, I thought the chances for an upcoming recession were increasing.  But if you look at the rates on May 15, 2018, it was just the longer-term rates that spiked higher.  The one-month and three-month yields actually dropped by .01 percent.  In other words, the yield curve steepened a little.  This does not indicate a recession.  We are looking for a flattening yield curve for a recession.

One day certainly does not make a trend, but you can still learn some lessons.  The financial markets are getting spooked easily with the prospect of higher rates.  The 10-year yield is closely correlated with mortgage rates in the U.S.  This means that there won’t be much refinancing in the near future.  It may or may not slow down the housing market.

The next FOMC meeting will be held June 12 and June 13.  It will be interesting to see if they try to calm things down by suggesting that they could slow down with hiking their target federal funds rate.

Meanwhile, the Fed keeps draining its balance sheet, even if slowly.  We have to believe that this is going to have an impact at some point and unwind any malinvestment that took place from the ultra-easy money that flowed from 2008 to 2014.

I am sticking with my permanent portfolio for a good portion of my financial assets.  There are so many variables pulling in different directions, it is really hard to know what we are going to get in the next year or two.  The returns haven’t been that great with the permanent portfolio in this environment of low interest rates and relatively low price inflation.  But you have to ask yourself whether the prospect for higher returns is worth the risk, especially when it comes to stocks.  Are you going to try to get another 10% out of the bull market with the risk of stocks dropping by 50%?

In regards to bonds, I still don’t think interest rates are going to spike significantly higher unless we start to see signs of significantly higher price inflation, which we haven’t so far.  Sure, the 10-year yield could easily go to 3.5% or even 4%, but I don’t see it getting to 6% or higher any time soon without much higher price inflation.

They say that high prices are the remedy for high prices.  Well, in this case, we could say that higher yields will ultimately be the remedy to higher yields.  If it spooks markets too much and a recession starts to loom, then rates will likely go back down as investors seek safety.

Regardless of what you think of the U.S. dollar and the solvency of the U.S. government, U.S. Treasuries are still considered one of the safest investments on the planet.