^ I understand (and somewhat agree) with all these arguments about targeting the short end of the yield curve....
right now. No question, as of Wednesday February 15, the best risk/reward tradeoff is in the short end.
My question though, is
when do you adjust to farther down the yield curve? Everyone on these forums is saying basically the same thing: "current conditions make the short end of the curve the best fixed income investment. Some time down the road I will go back to the long end of the curve when it becomes more attractive".
OK, so hum along in cash and the shortest term fixed income, forfeiting performance as you do so. Luckily you timed it so well, bond yields immediately go up, and then Mr. Market rings a bell and tells you that bonds have stopped falling and now you can go far down the yield curve -- really? Does that sound plausible over the span of several decades?
This is bond market timing.
It doesn't sound like market timing to people, for some reason. People have been saying this for years, at least back to 2009 when yields first fell quite low. For the last 8 years, people have unsuccessfully timed the bond market. That's a pretty long streak of timing failure.
Here for illustration is the chronic failure to "out-smart" the bond market. Those short term bonds XSB (blue) that were so obviously the best investment, according to everyone, have underperformed XBB (green). Which is exactly what you would expect if you have a neutral rate outlook, or even if you allow for mild rate increases:
http://stockcharts.com/h-sc/ui?s=XBB.TO&p=D&st=2009-01-01&en=(today)&id=p76152527729
Again -- why do we all recognize that we can't time the stock market, but we think we can time the bond market? Not only are you timing the bond market, but you're putting a lot of faith in a very specific scenario: rapidly rising interest rates and an end to a 36 year interest rate trend.
You might have better results than me, but I don't believe that I can time the bond market. This is why I stick to a certain reasonable long horizon maturity (VAB and its 10 year average) or the maximum CDIC insured GIC term (5 years).
The simple reason: with a neutral rate outlook, or even if you allow for mild rate increases, VAB/XBB (10 yr maturity) will outperform cash/GIC/XSB (short maturity) over decade-ish periods.
It's the couch potato strategy. You assume that you can't time or outsmart the market, and decide to just take exposure to the asset class.
Even if you are correct that interest rates are about to go higher, that's not enough. You also have to successfully time your entry back into regular (VAB) bonds. Get this timing wrong (e.g. everyone over the last 8 years!) and you dramatically underperform.