The Problem With Bonds
- By Matthew Tibble
- 6 min read
Summary
- Bonds are underperforming other asset classes this year.
- They struggle to offer adequate downside protection, unbalancing the traditional 60:40 portfolio.
- We would underweight bonds but caution against increasing risk through alternatives.
Bonds Are Struggling Right Now
The traditional 60:40 portfolio once served investors well. A 60% allocation to equities (for capital appreciation) combined with 40% to bonds (for income and risk mitigation) generated an 11.1% annual return over the last decade. And adjusting for inflation, you still got 9.1% – nothing to sniff at.
But bonds in particular, the defensive side of that ratio, are struggling with a multitude of headwinds right now, especially rising inflation. So far this year, emerging market bonds are down 10%. And the US is little better: high yield is down 5%, investment grade is down 8%, and government bonds are down 6%. March has been the worst month for US government bonds since former President Donald Trump was elected.
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