Interest rates are rising due to expectations of better economic growth. 

Economists expected inflation to perk up this spring due to higher prices from pent-up demand. Still, they don’t expect the increase to be sharp enough or sustain long enough for the Fed to take action. In fact, the Fed reiterated in March rate hikes are unlikely through 2023, confirming a willingness to let inflation and U.S. economy run hot. 

Over the last 6 months, investors have cooled on bonds, causing rates to move higher, take 10-year US Treasury rising from 0.66% to 1.73% ending March 19, 2021. Beyond affecting new mortgages and refinancing, investment portfolios with bonds are feeling an impact.

The Barclays US Aggregate Bond Market Index which returned +7.5% for 2020. This year through 3/19 it is down -3.6%, aligning to how bond performance works: when rates go up, bond prices go down. 

While it’s early, understand since 1976 this bond market index has been negative just 3 times in 44 years, with the worst return being -2.9% (1994). 

So do you abandon bonds? 

The better question: why do you hold bonds?  

Stability during market stress. Consider last spring, Treasuries continued to maintain their status as a safe haven during market stress. Other alternatives that could fill that role? In a month (2/13/20 - 3/13/20), Bitcoin lost -52%, Gold down -5%, while Treasuries rose.  

Aid in lower portfolio volatility. Risk control and income for those depending on regular distributions from their portfolios. Additionally, investors who can’t handle the stress of portfolio swings cause more harm by switching around positions or going to cash, than if they’d been diversified with focus on staying invested over the long-term. 

What can be done now?

Diversification. Origins of the 60/40 portfolio date back to stocks and bonds being the only two major asset classes. The evolution and access to indexes, funds and technology over the last few decades has provided choice for broadly diversified portfolios. Within fixed income, consider “Core & Explore”. Core stability from Treasuries and highly rated corporate bonds, then explore global fixed income with higher yields - if you can tolerate the higher volatility.

A TIP about inflation. When markets think one way and the opposite happens, shocks occur for extended periods. Markets think inflation is controlled. Treasury Inflation-Protected Bonds (TIPs), commodities, hard assets and real-estate investment trusts (REITs) help hedge against inflation or stagflation. When inflation heats up, stock-bond correlation will increase together, thus these should help bring lower volatility. 

Goals-based planning. Financial planners can help implement broadly diversified portfolios to align to an individual/family’s goals, needs, timelines and risk tolerance whether you are in an accumulation or distribution phase of your life. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Glenn Brown is a Holliston resident and owner of PlanDynamic, LLC, www.PlanDynamic.com. Glenn is a fee-only Certified Financial Planner™ helping motivated people take control of their planning and investing, so they can balance kids, aging parents and financial independence.