I-bonds where a good idea when rates were zero and there was a significant risk of capital loss with TIPs or Treasuries. Now that rates are hovering around 5%, there is an opportunity for capital appreciation in TIPs and Treasuries and you are compensated a bit more for holding (at least if inflation heads back to around 2% where the fed is targeting). I am rotating 30k of I-bonds into short term 1-2 year treasuries/CDs right now and plan to move to intermediate term corporate bonds if we get into a recessionary situation. My thinking is the yield curve is still inverted, or at least not compensating you appropriately for duration risk. ST treasuries will appreciate modestly if rates are cut, but long term rates should stay around their current rates as a ST rate cut will result in a more typical graduated yield curve. Corporates, especially piciking and choosing in the BBB range, should become more attractive when the economy is strained compared to treasuries.
TLDR - stay in 1-2 yr liquid treasuries yielding 5.3%+. A ST rate cut from 5% to 2.5% will result in a 2-5% capital gain that can be redeployed in 5-10yr corporates yielding 7-9%.
IDK, I think history says long term rates such as the
10y yield will reprice long before the recession is declared. For example:
The 10y yield fell 205bp from June 2007 until recession started in December 2007 (6mos).
The 10y yield fell 183bp from February 2000 until recession started in March 2001 (12mos).
The 10y yield fell 66bp from May 1990 until recession started in June 1990 (1mo).
Those drops occurred before anyone knew for sure that a recession was coming, and recessions aren't even announced by the NBER until at a minimum half a year has passed - sometimes longer. So my concern is by the time a recession is apparent, a lot of the gains in long-term bonds will have already occurred. If one's plan was to switch from short-term to long-term at that point when recession becomes apparent, one would miss out on the majority of the gains and end up underwater during the mid-recession bond slump / yield rally that occurred in each of those 3 previous recessions.
I think there are two games one could play if one knew a recession was on the way:
1) Long-term bonds until recession is being felt. Then go to short-term bonds for a few months. Then pivot to stocks.
2) Short-term bonds until at least a year after the start of recession. Then pivot to stocks.
I think either strategy historically works well, with the specifics of each recession dictating which approach would be optimal.
