Don’t Dump Those Bonds Just Yet

Question: The stock market has done surprisingly well in 2023. The Dow Jones Industrial Average hit a record high this month. Should I still be investing in Treasuries paying 5%?

Answer: In short, yes. Most advisors will say you need the portfolio diversification that bonds provide to protect against unseen calamities. But AMG also sees other essential reasons to own government Treasuries.

Tactically, shorter-term bonds provide reasonable returns, with great liquidity and guarantees. Strategically, a bucket of slightly longer-term bonds provides a guaranteed income stream and an opportunity to make a return if interest rates fall more than expected.

Shorter-term bonds are still good investments because there are signs that this market rally may not last. A slowing economy and a poor earnings outlook for 2024 might take the wind out of many investors’ sails. If the stock market falls or even just stalls going forward, a guaranteed 5% could be an amazing return. Additionally, short-term Treasuries are the most stable liquid-investment vehicle, ever. If the market falls too far, we can sell these bonds and likely will get back our expected return. If the stock market falls in a panic, there is a chance we make a little more as investors flee to quality.

Longer-term bonds provide more diversification. Creating a portion of the portfolio that provides both income and stability allows us to take greater risk in the equity side. This is important because when stocks fall, interest rates often fall, too. When interest rates fall, your long-term bond values go up. Thus, we don’t get seasick with a volatile market’s ups and downs.

While we all acknowledge “past results are no guaranty of future returns,” it’s still very tempting get in on a potential +20% rally. But having a solid, stable piece of the portfolio that we know is protected in downturns, is what allows us to enjoy the equity rallies without worry.