There is now an alternative to stocks
It’s back to normal for the 10 year Treasury Bond, as the chart below illustrates. In fact, with the bond yielding just over 4%, it is trading at its average yield since World War II. We think this approximates the yield investors can expect from a fixed income portfolio. One thing we are certain of – the experiment with zero interest rates is over.
What does this mean for our portfolios? It should make future returns less volatile and more predictable. Here’s why:
- Instead of earning next to nothing from fixed income, we can expect something between 3% and 5% from our non-stock investments.
- This makes a balanced portfolio a lot more “balanced.” We now have the opportunity to generate returns on the entire portfolio, not just the stock allocation.
- Balanced accounts will be less risky. And for clients depending on their portfolio for income, the certainty of funding that income has increased substantially.
- At some point, it will be prudent to move to longer term bonds (like the 10 Year Treasury) locking in rates of return over years, not just months.
Getting here was a painful process as interest rates increased in 2022. Bonds are now in the third year of losses, an unprecedented bear market for fixed income investments. We avoided those losses by buying only short-term bonds, settling for low yields.
But at this point, we think the worst is over for bond prices, and we can safely go back to normal allocations between stocks and bonds.
We welcome this new normal.
Daniel A. Ogden