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As Yields Tick Higher, Bonds Still Play a Key Role [Video] Thumbnail

As Yields Tick Higher, Bonds Still Play a Key Role [Video]

From a portfolio perspective, the recent increase in yields and the corresponding decline in bond prices have surprised many. Even in this challenging interest rate environment, bonds play a key role in risk management by providing diversification benefits through negative correlations to the U.S, international developed and emerging stocks, and other assets.  These benefits were particularly apparent during 2020 as bonds provided ballast against the volatile swings in U.S. equity markets:

Chart: Bonds Provided Relative Stability in 2020

As rates have ticked higher, investors may now be questioning the role of bonds in their portfolios.  To gain perspective, it is useful to examine bond performance during different interest rate environments:

Chart: Bonds have done well in various interest rate environments Rolling Hills, CA Darrell Capital Management, LLC

From 2003 to 2006, U.S. bonds returned 1.8% per year as interest rates rose.  They returned 4.3% per year from 2008 through 2015 when rates were flat, and 4.0% per year during the mixed rate environment in the back half of the last decade.  

While a rising rate environment is anticipated, there is potential for periods of flat and/or mixed rates.  Given positive returns across varying interest rate environments and clear diversification benefits, the case for maintaining bond allocations is strong.

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Advisory services are offered through Darrell Capital Management, LLC, an Investment Advisor in the Sate of California.  All content is for informational purposes only.  It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication of future results. Investing always involves risk and the possible loss of capital. Opinions expressed herein are solely those of Darrell Capital Management, LLC.  The information contained in this material has been derived from sources believed to be reliable but is not guarantee as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Being registered as an investment advisor does not imply a certain level of skill or training. Social media posts reactions and comments should not be viewed as endorsement or testimonials. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any state other than the state of California or where otherwise legally permitted.