As of June, 15th 2021, the broader U.S. stock market has been performing well with broad double-digit returns since January. The bond market, on the other hand, has been performing negatively. If you hold bonds, is it time to get rid of them? Let’s take a look and investigate why bonds are negative right now.
How bonds interact with interest rates
When interest rates rise, bonds typically fall. So why are bonds performing negatively, especially when the Fed has indicated that they’re not raising interest rates? There are a few reasons for this:
- The Federal reserve does not control the rate that you would typically see in a savings or money market account.
- The 10-year Treasury note is more dependent on the market for U.S. Treasuries. So far this year, those treasuries have been on the rise due to an expectation that we are going to see more of an economic recovery as we head into the fall. Treasury yields have actually begun to increase from the beginning of the year from below 1% to now sitting close to 1.5%.
Not all bonds are created equal
It’s important to remember that not all bonds in a bond market are created equal, and there are many different types. Some bonds, like high-yield or floating rate, have actually been performing substantially better this year because they’re not as sensitive to interest rate fluctuations (but they also tend to be associated with default because they have a lower credit quality).
Maturity of the bonds also factors in when it comes to price volatility. Generally, the shorter-term bonds right now (such as the two-year compared to the 30-year) will be much less impacted by the lowering or raising of interest rates.
Should you ditch bonds altogether?
The good news is that we don’t expect the 10-year Treasury note to go much higher. You might want to hold off on getting rid of the bonds in your portfolio, because bonds are a strategic part of diversification. For many in retirement, bonds hold the more conservative side of the portfolio and can provide stability, especially when the stock market is volatile.
However, if you have any questions or concerns as to whether your current bond market position is right for you, please contact us today. Our financial advisors will be happy to discuss your current situation and make sure that your portfolio is aligned with your financial goals.
The Team at Chatterton & Associates
Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc., nor its registered representatives, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.