Research Why should I own bonds?
Key takeaways
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Bond hesitation:
Because of the high correlation between stocks and bonds since the rate hiking cycle, you may be hesitant about bonds.
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Inflation slowdown:
Historically, when inflation has been below 3%, the correlation between stocks and bonds has decreased.
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Lock in rates:
It may be time to lock in the high current yields on bonds, which can potentially protect against stock market drawdowns.
Since 2022, we’ve seen elevated inflation and one of the most aggressive interest rate hiking periods in history. It has soured many investors on bonds and they’re still hesitant to jump back in because of the high correlation between stocks and bonds since the rate hiking cycle.
Our solution
Now might be a good time to jump back in given the slowdown in inflation. Historically, inflation below, below 3% has led to a decrease in correlation of stocks and bonds. (See chart below.)
We believe it’s worth revisiting bond portfolios because the rate hiking cycle has ended and the easing cycle has begun. It’s a good time to lock in rates and potentially protect against equity drawdowns because there’s no certainty that we achieve a soft landing in the economy.
The environment for fixed income has changed meaningfully since the start of 2022. Bonds now have higher yields that can provide a cushion against rising rates, while the Federal Reserve easing lowers the potential for rates increases on the long end of the yield curve, which we experienced in 2022.
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Important information
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Past performance does not guarantee future results. An investment cannot be made directly into an index.
All investing involves risk, including risk of loss.
The Ibbotson® SBBI® Ibbotson US Long-Term Government Bond Index is an unmanaged index representative of long-term US government bonds.
The Ibbotson® SBBI® US Large Cap Stock Index is an unmanaged index representing the broad US large cap stock market.
The Bloomberg US Aggregate Bond Index is an unmanaged index considered representative of the US investment grade, fixed-rate bond market.
The opinions referenced above are those of the author as of Nov. xx, 2024. These comments should not be construed as recommendations but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations.
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