Those investing for their later years or relying on income from investments in retirement have had little to cheer about in recent years regarding bonds, often a staple of many portfolios.
Yields on Treasuries have been low, and as inflation ticked up, the net return on bonds was barely enough to keep up.
But that has changed. Higher inflation, increased debt issuance by both the federal government and private companies, and worry over the rapidly rising federal debt have all driven yields up to levels not seen since 2007. The 10-year Treasury, for example, rose last week to 5.1% from 4.1% a year ago – a 24% relative increase.
So, bonds might well be an attractive addition to a portfolio. Or, if you already own them or other fixed-income securities, you should see an improvement in returns.
Bonds typically provide a nice cushion against a downturn in stocks while also giving the security of an income stream because the issuer pays interest throughout the term. I am a firm believer in their value and have about 29% of my portfolio in bonds and fixed-income securities, so bring on those higher rates.
“The closer you are towards your retirement, the more income you want,” said Charlie Ripley, vice president of portfolio management at Allianz Investment.
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A New Era for Interest Rates
The Federal Reserve raised interest rates this month for the first time in three years, increasing them by a quarter point. And all indications suggest the central bank will probably do that again this year. While the aim is to stem inflation, so far Fed policy has led to higher bond yields. Even the Fed says it will be 2029 before rates return to the central bank’s 2% annual inflation target. That virtually assures that higher rates lie ahead, and even if there is a break, they are not going back to the levels of the early 2000s.
Then there’s the stock market. The recent pullback in equities, especially the leading technology stocks, should make one cautious about how long stocks have left to run.
“The last 10 or 11 years have been boom years for the stock market,” said Adam Bergman, founder and CEO of IRA Financial Group and IRA Financial Trust. “There is going to be a pullback, so you’re going to need bonds.”
If possible, holding bonds in a tax-deferred or tax-free account like an IRA or a Roth IRA is advisable.
If you already have enough bonds – and experts generally recommend your portfolio is 30%-40% in bonds and other fixed income investments – it may be worth checking their duration as you can swap some short-term bonds or funds for longer-duration ones. But bond managers already do some of that work for you.
“If you are in a bond fund, the managers are already laddering,” Bergman added, meaning they are adjusting the duration for you.
Consider Alternative Investments
Some advisors suggest adding investments like gold and private credit funds to a portfolio as a hedge against growing geopolitical risk or inflation that proves hard to curb. Before COVID-19, Bergman said, “We haven’t lived in inflationary times for almost 40 years.”
Gold is more of a straight return play but it can be volatile, as can other alternatives. All should probably be held in IRAs or Roth IRAs to mitigate tax concerns.
Whatever you choose, know what you are buying and how it fits into your specific portfolio. But in these times of stretched stock valuations, inflation and higher interest rates, an ounce of protection against downside risk is prudent.