With Interest Rates Low, Why Bother With Bonds?

Given low interest rates, have we changed our allocation to bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. among government, corporate, high-yield and international debt? Vice President Steve Johnson spoke about how we’ve positioned our fixed income investments for 2021 in our recent webinar,* A Tale of Two Recoveries: Will Main Street Catch Up With Wall Street?

Please enjoy the excerpt below and click here for the full webinar replay to hear more. 

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Steve Johnson:

You’ll hear this discussion among investors that with interest rates so low, why bother with bonds? I think of bonds as a shock absorber. After the market has a tough day, I go home and have a little comfort food, I want roasted chicken and mashed potatoes. That’s what my bonds are. My bonds provide that stability so that on the day when stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. are down, I can usually know that bonds are green, providing that balance to the portfolio.

The Federal Reserve met today, and they talked about interest rates. Over the last couple of years, we know that Fed Chair Jerome Powell has told us that they are going to keep rates lower for longer.

In fact, Powell’s not even thinking about thinking about raising rates, despite one or two other members who may object. Interest rates are going to stay really low. Your cash is earning zero, it’s losing money. Even though corporate bonds are yielding, on the short end, between 1% and 2%, that is a lot more than zero. If you invest over a longer period of time, the power of compounding takes effect. That’s why we stress that we maintain bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. allocation.

Now, our managers favor corporate bonds right now. I think there is the belief that the economy will strengthen, and with that, we know that corporate bonds tend to do well. They’re providing a higher rate than U.S. government bonds and Treasurys. But we still want to own some Treasurys, not knowing what the future holds. Clearly, there is room for fixed income and bonds in your portfolio. Right now, I think we do favor the corporate side. But it doesn’t mean that we’re not looking at other areas like high-yield bonds.

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Click here for a replay of A Tale of Two Recoveries: Will Main Street Catch Up With Wall Street? Please contact us at (800) 492-6868 to learn more about our comprehensive wealth management solutions.