Hot Topics: Bonds are back

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With stocks knocking it out of the ballpark lately (except for the fourth quarter of 2018), my perception is that people have kind of forgotten about bonds. When it comes to Hot Topics, it seems like bonds aren’t even part of the conversation anymore. 

And that’s a shame, because in terms of total returns, bonds are one of the unsung heroes in mixed portfolios right now. 

Historically, bonds typically do not generate the high returns stocks are capable of generating. But that’s okay, because bond investments typically aren’t intended to grow an investor’s money. Instead, they’re an insurance policy in a diversified portfolio, reducing the risk in a portfolio and providing investors with diversification, guarding against declines in equities. 

So it makes sense that bonds would show anemic returns during an equity bull market. According to Steve Guinn the Barclay’s US Aggregate Index which tracks their performance, bonds generated a 0.5 percent total return in 2015, a 2.5 percent return for all of 2016, a 3.5 percent return for all of 2017, and an underwhelming 0 percent return in 2018. No wonder investors stopped thinking about them. 

But so far in 2019, bonds are off to a good start, up about 2.9 percent in total return, from the beginning of the year through mid-April according to the same Barclay’s US Aggregate index. That’s a solid improvement over the last few years, generated in a little over three months. Why are they suddenly generating returns? When interest rates go up, bond prices typically go down, which can actually reduce their total return. But right now, investors with mixed portfolios are experiencing the opposite, where bonds as an asset class are doing more than just reducing risk. They’re actually adding to the returns, giving investors a bit of a breather from equities volatility while generating higher total returns. For investors, it’s a little unusual to have both sides of the portfolio generating solid returns. 

Bonds definitely have their place in the conversation. Have questions about how bonds might fit in your portfolio? Contact your Regency advisor today.

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