Are Bonds Becoming a Better Investment for Portfolios?

Summary

• US Treasury yields have risen to their highest levels in decades, making bonds appear more attractive on initial assessment.
• Longer-duration bonds may increase portfolio risk in the near term and may not serve as a reliable hedge when investors avoid risk.
• Increasing bond allocations may be more suitable for investors with longer time horizons.
• Key factors for asset allocation include relative return, relative risk, correlation benefits, and return versus cash.
• Goldman Sachs Research expects equities' relative return to be boosted by earnings growth in the coming months.
• The optimal bond allocation over the last five years was close to 0% due to poor bond returns & strong equity performance.
• Strong earnings growth in the tech sector & artificial intelligence theme may cushion higher bond yields.
• Relative risk for bonds has improved due to higher yields offering more carry, yet remains elevated amid Middle East tensions & inflation uncertainty.
• European sovereign bond issuers face pressure as French & Italian yields rise relative to German yields.
• Volatility in European fixed-income securities & foreign exchange can create a double whammy for investors.
• Equity-bond correlations have been positive recently, with both assets often moving in tandem.
• Medium-term equity-bond correlations could turn negative if inflation normalizes & excessive tightening weighs on growth sentiment.
• Shorter- to medium-term government debt offers more value than longer-term bonds because central bank policy is unlikely to drive rates substantially higher.
• The optimal bond allocation over the very long run since World War II has averaged 40%, aligning with a 60/40 portfolio.
• The 10-year US Treasury yield of 5.3% is higher than the 250-year average of 4.7%.
• Conditions for a traditional 60/40 portfolio may not be as favorable as before the pandemic, requiring harder work within asset classes.
• Portfolio building for the next decade should include exposure to innovation, inflation protection, & better risk mitigation.
• Equity allocations should favor technology stocks & real assets.
• Bond allocations should include inflation-linked bonds such as Treasury Inflation-Protected Securities (TIPS).
• Factor investing like low-volatility & selective high-dividend-yield stocks can help reduce risk.
• Commodity trading advisors (CTAs) have historically offered inflation protection & crisis protection.