Should you buy government bonds during a bear market / recession?


As we get close to the end of this bull market and economic expansion, one of the things I’ve been thinking about a lot is “what’s the best asset to buy during a bear market & economic recession”. (Aside from shorting stocks).
Real estate is not a good idea, because the inflation-adjusted price of real estate goes down during recessions.

Gold is not a good idea either. Most people see gold as an asset that surges during “flight to safety” periods. This was clearly not the case in 2008, when gold tanked along with the rest of the market. Gold is generally bullish when:

  1. Inflation rises (see 1970s), or…
  2. There is a massive printing of money, whether it be through a surge in the money supply or a currency devaluation (eg 1933 when FDR devalued the USD, which was linked to gold at the time).


That leaves us with government bonds.
*I am not refering to corporate bonds. Corporate bonds act like stocks during recessions and bear markets. Hence, owning a corporate bond during an equities bear market is very similar to owning a stock itself during a bear market.

Government Bonds

I would like to clarify that I am referring to government bonds of the highest quality (e.g. U.S., Australia, Canada). I am not referring to EM government debt, Portugese/Ireland/Greece/Spanish/Italian government debt.
*I don’t think the U.S. will default despite high levels of debt. Should the U.S.’ debt become too heavy to bear, the Fed is more likely to inflate its way out of debt rather than to default (which is what Ray Dalio’s book Big Debt Crises supports as well).
Now I would like to note a key difference between buying short term Treasury bonds (e.g. 2 year bonds) vs. long term Treasury bonds (e.g. 10 year bonds).

  1. When you buy a short term bond, you essentially want to hold the bond to maturity and earn the bond yield.
  2. When you buy a long term bond, you want to make some money from the bond yield but make even more money from the increase in the bond price (i.e. decrease in the long term bond yield).

The first option is clear and easy: just buy a 2 year Treasury bond before a recession and hold it to maturity. Based on how long bear markets and recessions last (1-2 years), your bond will probably mature near the bottom of the bear market. That means your capital will probably be available to buy stocks near the bottom of the bear market.
Don’t laugh at 2-3% returns. When everyone else is losing -30%, you’re much better off with +2% returns. The big money is made in a bull market, so focus on capital preservation during bear markets.
But what if you want to bond long term Treasury bonds?
That really just comes down to a question of “do you think long term rates will go up or down” during recessions and bear markets. Buy long term Treasury bonds if you think long term rates will go down during an economic recession and equities bear market.
Here’s the problem. While long term rates went down during the 2008 bear market and recession, long term rates don’t always go down during recessions and bear markets. That depends on the nature of the recession and bear market.
Here’s the data.

10 year yield during 40%+ bear markets

Here’s what the 10 year Treasury yield did during the S&P 500’s 4 major bear markets from 1950 – present

As you can see, not all bear markets are alike. The 10 year yield tends to go down during bear markets that are accompanied by falling inflation (see 2000-2002 and 2007-2009), while the 10 year yield tends to go up during bear markets that are accompanied by rising inflation (see 1969-1970 and 1973 – 1974).

  1. Most recessions and bear markets witness falling inflation (demand-pull inflation)
  2. Some recessions and bears witness rising inflation (cost-push inflation)

10 year yield during economic recessions

Here’s what the 10 year Treasury yield did during the U.S.’ economic recessions from 1962 – present

Once again, you can see that:

  1. The 10 year Treasury yield falls in most recessions because inflation usually falls during recessions.
  2. Sometimes the 10 year Treasury yield rises during recessions because inflation sometimes rises during recessions.

So really, the question of “should I buy long term Treasury bonds during recessions” comes down to a prediction of inflation, because inflation and interest rates have a very strong correlation.

At the moment, I do not know a good way to predict inflation 2-3 years into the future. Hence, I don’t know if it’s a good idea to buy long term bonds during the next recession and bear market.

Yield curve steepener

Here’s an interesting trade to consider during bear markets. Try putting on a yield curve steepener trade. Just some food for thought.

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