Bonds May Not Be As Risky As Many Think

This recent stock market rally has highlighted a few trends that have only accelerated of late, among these, the negative correlation between bond yields and stock prices has continued strong. In this article, I’m going to discuss why this is important for investors, and what it means for fixed income investors in particular.

Bonds and stocks do not typically move in the same direction together, indicating just how odd the times are we find ourselves in today. Central bank stimulus has driven the majority of this divergence between the two asset classes. That said, those that have invested in government bonds in recent years and are now tempted to sell said investments for large gains may want to consider holding on a while longer.

I would encourage investors to consider the idea that government bonds could indeed outperform for the foreseeable future. This is because I expect interest rates to say low for a very long time and central bank stimulus to continue, and potentially increase, over time.

We’re now in a state of new normal, where interest rates could change by a fraction of a basis point on a daily basis moving forward. A return to the 1980s level of bond yields and interest rates is very unlikely, so fixed income investors do have a harder decision to make than what may otherwise seem clear.

Invest wisely, my friends.