The Role of Bonds in a Low-Yield World - Adviser Investments

The Role of Bonds in a Low-Yield World

May 20, 2021

Should investors try to replace the return on long-term bonds in a low-rate environment? Do bonds still have a role in a diversified portfolio? Chairman Dan Wiener discussed the state of the bond market in our recent webinar,* Inflation, Inoculation and Infrastructure: Defining the New Normal.

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

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Dan Wiener:

The bond market has been going up for 40 years. In fact, it hit an all-time high in August of last year. You couldn’t get a 40-year Treasury bond 40 years ago, but someone who bought a 30-year Treasury in 1981 earned more than 13% a year for 30 years. Over that time, interest rates went lower and lower, but they kept earning 13%. By the time that bond matured in 2011, you could only get 4.5%, or about a third of the yield, on a 30-year bond. That gives you a sense of just how well bonds did for three decades.

By the way, inflation ran 3.1% over that 30-year period. Earning 10% above inflation for 30 years is unheard of. So, falling bond prices are, I think, a brand-new situation for most active investors today.

If you think about someone who begins to invest at age 20, maybe through a 401(k) at work, you’d have to be 60 years old or older today to know what it means to see both a falling bond market and inflation. Since that 30-year bond I talked about matured in 2011, inflation has just run 1.7%. So, even if the person who had sold the 30-year bond 10 years ago, and bought the 4.5% 30-year bond that was available, that yield still looks pretty juicy today given that yields on 30-year bonds today are at about half that level. So, even experienced, older investors like me haven’t seen bond prices do much more than rise for most of our investment education.

So, now what? You have to understand and accept that bonds aren’t going to make lots of money. But they still have an important role in the portfolio. They’re a buffer against volatility. It keeps you in the stock market, but there’s more to knowing thyself than just accepting the facts about stocks that haven’t had a big or long bear market and bonds that simply can’t do what they did for 40 years.

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Click here for a replay of Inflation, Inoculation and Infrastructure: Defining the New Normal. Please contact us at (800) 492-6868 to learn more about comprehensive wealth management solutions.


*Webinar recorded after the market closed on Wednesday, April 28, 2021.

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