There is a common saying that time heals almost everything. Yet, even as we embark on the fifth year since the pandemic began, most of
Sound the Alarm… Stay the Course
Published Date : November 18, 2013
The media is overly focused on propagating a falsehood, specifically, that bonds are now riskier than stocks. This is sensational financial journalism at best and, at its worst, potentially retirement damaging advice.
It is a universally accepted truth that the 30-year plus tail wind to bond performance, caused by falling interest rates, is now behind us. Interest rates have had their initial dramatic reset, with the 10 year yield on US Treasury bonds rising to 2.9% from the year-to-date low of 1.6% on May 2nd. Interest rates spiked on certain “taper tantrum” volatility as investors speculated that the Fed, based on its commentary, would begin to slow its purchases of Treasury and mortgage backed bonds. With the knee-jerk reaction of “tapering” out of the market’s system, we now forecast rates to rise modestly over time – as they should in a modest growth and inflation climate. We have positioned client portfolios for exactly this kind of environment with our focus on shorter average maturity, high quality fixed income instruments. This bond allocation is designed to insulate the portfolio from interest rate shocks, as well as create the opportunity to ultimately benefit from re-investment in a higher yielding market.
All is not lost for bond investors, even in a rising rate environment. Over any period greater than one year, coupon rates bail portfolios out by providing regular, current income that generates a total return not nearly as dire as the media would have you believe, even if rates rise another 1% from here. While the total return environment will be anemic, bonds will likely deliver modest compensation over a multi-year period with the added benefits of dampening portfolio volatility and providing relative safety. One need not look further than the most recent months, with stocks pulling back more dramatically, for proof of that relative safety of bonds and the important buffer they contribute to any balanced portfolio. Irrespective of the market and interest rates, the regular cash needs of clients for spending and gifts also dictate the need for fixed income in portfolios. The reliability and predictability of bond interest payments, in contrast to more volatile equity returns, ensures essential spending commitments are sufficiently funded.
There are a lot of headline risks in the world and so it is natural, particularly for those who keep themselves more engaged and knowledgeable, to get into a dark place about outcomes from time to time. It is important to remember that while other asset classes may offer greater potential for returns in today’s market, along with that greater potential for return comes greater potential for risk – a fact lost on many headline writers. Fixed income can, and should, remain core to investment portfolios due to its potential for income generation, volatility dampening and capital preservation. Looking forward, the outlook for bonds is remarkably balanced over the next couple of years and our clients are well-positioned to benefit in the long-run as we act as opportunistic buyers during periods of short-term pullbacks.
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