Congratulations are in order! You have weathered one of the worst bond markets ever recorded! The US 10-year Treasury Bond is poised to show negative returns for three consecutive calendar years (2021-2023). This phenomenon has never happened before. This news may cause some investors to consider getting rid of their bond investments. Would that be prudent? Certainly not! Let’s take a closer look.
First, we will look at the “see-saw effect” that interest rates have on existing bond investments. When interest rates go up, bond values go down. When interest rates decline (you guessed it), existing bond values go up! Picture a good-old-fashioned playground see-saw. Interest rates are on the one end, your bond investments are on the other. Rapidly rising inflation caused interest rates to rise quickly during the past few years, consequentially pushing existing bond investments down in value. This challenge persisted because as interest rates rose, new bonds were issued with higher yields. This caused existing bonds to see a price (value) decrease to account for these new, higher yielding bonds in the market. Does that mean that existing bond investments are worthless? Absolutely not!
Armed with these facts, the Master’s Investment Review Committee (IRC) has a more positive outlook on bond investments than we have had for a decade, or two! Simply put, we are quite optimistic about bond investments going forward. Listed below, you will see several of the key points that drive this conviction.
- Bonds are far more predictable than stocks in most time horizons. Almost “anything under the sun” can cause stock market volatility. However, the primary risk of quality bond investments is interest rate movement. The effect of interest rates is predictable, and if the bonds are held to their maturity, we know what return investors will receive.
- Rising interest rates have pushed the current yields on quality bonds into the 5%-7% range. We have not seen yields at this level in a long time. Contrast those numbers with the yields we experienced in the 2010-2020 era, hovering between 1%-4%.
- Remember the see-saw! When interest rates have hit their peak, and start going down, your bond investments become quite attractive. You will be earning the higher yields mentioned previously, while the principal value of your bonds is rising as well. We want your portfolios to be well-positioned when the interest rate see-saw changes direction!
Remember that Master’s IRC systematically monitors your investment portfolios on your behalf. As rates have risen, we have made strategic allocations in bonds to dampen the volatility of this changing environment. We are forward-looking and believe we have your portfolios well-positioned for the future! Please contact us with any questions or comments. We welcome the opportunity to discuss this topic with you!