With the increase in interest rates start the year and the relatively low yields offered by bonds, some investors are questioning their need to hold bonds. However, in May we saw another example of why it’s important to maintain a high quality bond allocation in a portfolio.
Stocks rose to start the month on solid economic news and corporate earnings, but numerous geopolitical issues cropped up in the second half of the month worrying investors. As a result, stocks fell and bonds rose. The yield on the 10 year Treasury fell from 3.11% to 2.82% over that time with the total bond market up 1.4%. When interest rates fall, bond prices rise. Meanwhile, US stocks declined 1.6% and international stocks fell 3.7% from their peak to trough over the second half of the month. Thus, high quality bonds fulfilled their role as a diversifier of equity in May.
Stocks and high quality bonds won’t react exactly the same to all events, but we expect the general relationship between stocks and high quality bonds to continue to hold. When issues crop up that drive investors out of more risky investments like stocks, they will likely move to safe haven investments like high quality bonds, driving up their value. The same scenario as shown in the example above has played out countless times before with the Financial Crisis of 2008-2009 being another prime example. Therefore, we expect a portfolio of high quality to hold up well in a time of stock market stress and therefore the time when you need it most.
|Index Performance||May||YTD||1 Yr|
|US Stock (Russell 3000)||2.82%||2.55%||15.06%|
|Foreign Stock (FTSE AW ex US)||-2.29%||-1.77%||9.94%|
|Total US Bond Mkt. (BarCap Aggregate)||0.71%||-1.50%||-0.37%|
|Short US Gov. Bonds (BarCap Gov 1-5 Yr)||0.49%||-0.26%||-0.52%|
|Municipal Bonds (BarCap 1-10yr Muni)||0.84%||-0.15%||0.02%|
|Cash (ICE ML 3Month T-Bill)||0.15%||0.64%||1.28%|