In the Investment world, it’s noticed that Bonds often don’t get the same limelight as its given to the stocks. This can be seen with the known retirement portfolio of 60/40, where more weight of 60% is given to stocks than to Bonds. With history as evidence, stocks have outperformed bonds by 40% in a 60/40 retirement portfolio, and since 1929 stocks have averaged about 9.5% annual return to 5.5% return for the Bonds.
In fact, for younger investors who have a long-term horizon and are at least 20+ years away from retirement, its often recommended to have 80/90 percent of the retirement portfolio in equities.
Since the housing crises of 2008, we have been in a low interest environment where stocks were preferred over the bonds. However, in March 2022, the Federal Reserve announced it first rate hike once the consumer price index reached 8.5% (one of Fed’s gauges to measure inflation) lifting the rates from near zero to current range of 4.75%-5.0%
The recent rise of the interest rates has made Bond investments attractive and with fears of recession, the short duration yields should be given serious consideration by the investors. Bonds, as we know can be US Treasuries, Munis, Corporate, International and among other types. Careful analysis needs to be done by Investors before adding Bonds into their portfolios, since Bonds can be complex, we recommend retail investors to talk to their financial advisor for guidance. Here in this blog, we will briefly cover the US treasuries and its current importance in a diversified portfolio.
As seen from the chart above dated 4-28-2023, the yield curve is inverted and short yield for 1 month to 2 years are offering an attractive return. Typically, in a normal economic cycle, the longer term 30-year and 10-year treasuries have higher yields on the yield curve than the shorter term 1-year or 2-year but when there is economic uncertainty, the yields get inverted with shorter term rising higher than the longer term, this leading indicator is also sometimes an indication of a recession ahead.
With current S&P 500 multiple at 18.61, stocks are still a bit overvalued and since there is fear of slowdown in the coming months and with economic uncertainty, the US short duration risk free treasuries offer an attractive alternative in a diversified portfolio. Treasuries are guaranteed by the US government and are rated AAA, they can be purchased individually or through an ETF or a Mutual Fund directly from the US government or through a broker dealer.
Should you have any questions or you want to learn more then please reach out to us at www.bluearis.com – we offer free initial consultation.