The worst bear (down) market ever, in fixed income (bonds), unfolded from August, 2020, to October, 2023. You lived through it. Maybe you didn't even know it happened. During that time, bond investments like what most of us own in our IRA's and 401k's, fell by about 24%. This gave rise to hand-wringing and worrisome chatter about the usefulness of the classic 60/40 portfolio, where bonds occupy the 40 part.
But like a bear market in stocks, the worse things get, the better the outlook becomes for patient, long-term investors like us. For the past year, bonds have risen by about 17%. Money market fund yields have risen from near zero to over 5%. What's not to like?
What's not to like is the probability that 5ish money market yields could shrink into the 4's over the next year. The chart below shows current expectations for the Fed Funds Rate. By the way, that's the only rate the Fed controls. All other rates, like for loans and other credits, are the result of global bond trading, most of which is done by computers.
Relax. This is nowhere near apocalyptic. Bonds in long-term portfolios should do just fine. The current yield of a bond is a good indicator for its future return. The current yield on widely-held bonds is around 4%. With inflation headed toward 3%, bonds are offering decent compensation.
So, let's net this out for most portfolios.
👉If you have a reserve, an emergency fund, or money earmarked to buy something within the next 3-5 years, holding it in a money market fund, CDs, or a short-term bond fund will be fine. Just expect the rates to gradually work lower.
👉If you have bond funds in retirement plans like an IRA, 401k, or in taxable accounts, chances are they are part of an intentional asset allocation strategy. There's no reason to abandon that. Stay the course.
Everyone's situation is a little different. Your life path is not like anyone else's. If you'd like to have a conversation about this, here's how to reach us:
Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315
Evidence-based. Rules-driven. Policy-focused.
