Don’t rule out bonds just yet

Taking a contrarian view to that of major news outlets that bonds are now dull investments that no longer offer the safety it was known for after 40 years. With indicators showing a drop in US inflation, the Fed could very well be forced to raise interest rates again which would be bullish for Treasury bond prices and investors shouldn’t miss out on this opportunity.

Bonds have provided safety and income for 40 years since the Nixon administration removed the US from the gold standard in 1971. It has kept up with inflation only second to stocks and provided investors with robust and profitable investment portfolios helping secure retirement and other financial objectives. No question, with the massive reversal of low rate policy and decline in bonds relative to stocks, bonds have not provided investors with protection or income and yields remind too low below inflation to be impactful.

“Balanced” portfolios include the weighing of stocks versus bonds to determine risk tolerance as bonds historically provided a safe haven for investors in times of stock market volatility. This is no longer the case as both bonds and stocks lost money in 2022 and this year, bonds have continued to weaken as a result of ongoing aggressive Fed action of cutting rates

This dynamic could reverse itself if the Fed finds itself raising rates, which is a distinct possibility. Inflation is coming down and it may be that the Fed overshot its mark trying to reduce rates. The risk of a recession is also coming down. The labor market remains strong with no immediate reason to suggest otherwise.

Bonds should therefore remain in every balanced portfolio as investors should capture a rebound in bond prices when it inevitably happens under a rising rate scenario. The FT said, “For investors, the mes­sage pro tem is that bonds, while unsafe and very risky, offer a sub­stan­tial yield uptick rel­at­ive to cent­ral banks’ infla­tion tar­gets of about 2%. The fin­an­cial world is noth­ing if not para­dox­ical.”^2

At Eureka Wealth Management, I help clients determine their investment strategy based on their risk tolerance and tax situation. I also do retirement planning and insurance/estate strategies. Call for a free, initial consultation at (760) 537-0791 or book online at eurekawealthmanagement.com.

Sources: https://www.bloomberg.com/news/articles/2023-08-13/goldman-pencils-in-first-fed-rate-cut-for-second-quarter-of-2024?srnd=premium

^2 FT ”Bonds are no longer the safe option but risks are nuanced” link