The past four years represent some of the most challenging years ever for bond investors. Consider the following information and chart from y-charts:

1. Bonds were down in 2021 for the first time in a decade, receding -1.5%.
2. The next year, in 2022, the Bloomberg US Aggregate Bond Index lost over -13%, its worst year in over 100.
3. Even with positive returns in 2023 and so far in 2024, the bond index is still below where it began 2021.
4. For the past five years, the total return to bonds is slightly less than 0%.
5. The yield curve, while not technically inverted, is not at all close to “normal” (i.e., upward sloping (see the chart below).

If the yield curve is to “normalize” then the rates of maturities from 1-3 years would need to be lower than the yields from 5-30 years. This means that either short-term rates need to drop, long-term rates need to rise, or a combination of these two things needs to occur. Our view is some of both will occur as the yield curve normalizes. If rates rise in the mid-term maturities, there will be additional pain for those tenors. Thus, we are positioned in shorter maturities in our bond investment portfolio while we emphasize adjustable-rate instruments. We believe this is the correct positioning to thrive in an admittedly strange bond investment climate. We are also encouraged that we are clipping a healthy 6% dividend yield as we wait for the yield curve to normalize. This to us seems like a good current position, all things considered.

It would be easy to understand why an investor may have become disenchanted with bonds over the past five years. This alone presents a psychological challenge to investors to stay invested in bonds when their returns have disappointed for five years. Add to this this the current non-normal slope of the yield curve, and investors might be totally confused about how to approach bonds today. We get it.

But our position at WealthPlan is that bonds DO still have a vital role to play in most investors’ portfolios. But navigating the current interest rate environment requires some mental flexibility to approach bonds in a way that is different from the ways that worked from 1981-2020. Eventually, those ways will return. But until then, we are willing to stick with our present tactics and clip a 6% return while we wait.

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DISCLOSURES

The Bloomberg US Aggregate Bond Index (^BBUSATR) is used as a benchmark for investment grade bonds within the United States. This index is important as a benchmark for someone wanting to track their fixed income asset allocation.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing. Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed.

No investment strategy can assure success or completely protect against loss, given the volatility of all securities markets. Statements of forecast and trends are for informational purposes and are not guaranteed to occur in the future. All performance referenced is historical and is no guarantee of future results. Securities investing involves risk, including loss of principal. An investor cannot invest directly in an index.

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