Published on www.MarketWatch.com: Aug. 4, 2020 at 12:52 p.m. ET
By Ben Carlson
Bonds play a role in an investment portfolio, even amid historically low interest rates
What’s the better performer 2020 year to date — the red-hot Nasdaq 100 index of tech behemoths (Apple, Microsoft, Amazon and Alphabet, etc.) or boring, old long-term bonds?
The Nasdaq 100 ETF QQQ is up an astonishing 25.5%. But the long-term treasury ETF TLT is up 27.3%. Surprisingly, long-term bonds are outperforming tech stocks.
Yet, according to Deutsche Bank, we’re now experiencing the lowest government bond yields in well over 200 years:
Fixed income assets, such as bonds, typically provides regular cash and lower volatility when markets hit turbulence. And, bond prices often are uncorrelated to equities. Stocks typically do well in periods of economic growth, whereas bonds typically do well in periods of declining economic activity and recessions. Additionally, bonds offer downside protection and moderate upside potential as investors tend to seek out the safety of U.S. government and investment-grade corporate bonds amid stock market uncertainty.
Many investors have been saying for years that bond coupon rates and yields can only go up from here, and yet, they’ve done nothing but fall more. And maybe they’ll fall even further and possibly go negative like in Europe and Japan (something we should not rule out in the U.S. if the pandemic worsens).
But eventually short-term movements in rates will wash out and the long-term returns will be based more on the current bond yields. When you consider how paltry those yields are, investors in fixed-income are guaranteed to see minuscule returns from here over the long haul.
So why own bonds at historically low yields? Some reasons:
- Bonds hedge stock-market volatility
- Bonds can be used to rebalance
- Bonds can be used for spending purposes
- Bonds protect against deflation
- There are other asset class options, but there aren’t many
Although bonds and bond funds have done extremely well in 2020, the bottom-line regarding bonds and bond funds…you can either earn less income from low yielding bonds to better protect your capital or earn more income from dividend paying stocks to accept more risk in your portfolio.
Read the entire opinion article at: https://www.marketwatch.com/story/why-would-anyone-own-bonds-now-there-are-at-least-five-reasons-2020-08-04
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