The Truth about Bonds

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  • Long bonds are a hot topic these days. How can rates go any lower? What happens to bonds when interest rates spike? What if we become Japan?
  • Long bonds are an enduring asset that serves as a truly diversifying asset. Regardless of the environment, long bonds have low drawdowns relative to equity and maintain low correlations with the S&P 500. Among long bonds, the 10-year is especially attractive relative to the 30-year: similar return, with much lower risk.
  • During the largest spikes in interest rates, the 30-year and the 10-year endure pain, but it is not catastrophic. Relative to equity, the worst case scenarios are a stroll through the park. During the largest decreases in interest rates, the 30-year and the 10-year perform well (as expected).
  •  In a hyperinflation scenario, we are all dead: Bonds are going to be a bad investment; stocks are generally going to be a bad investment; and corruption will rule. Gold, guns, and water will be the only safe haven.
  • Maybe we are in a deflationary environment, but yields are so low? Who in their right mind would invest in bonds? Some perspective: The JGB 10-year broke 1.80% in April of 1998. The US 10-Year is 1.80% as of August 15, 2012. From April 1998 through July 2012, JGB bond performance dominated Japanese equity. Something to think about.
  • Overall, the evidence suggests that investors should always hold some portion of their portfolio in bonds. If an investor can truly predict the future of interest rates, they should start the next PIMCO.

Team Mission: To empower investors through education.