Chart of the week

Low yields have broken the traditional “40” bond portfolio

Traditional bonds are providing little yield with more interest rate risk than ever. Our chart looks at the asymmetrical risk-return outlook.

October 9, 2020 | 2 minute read

Barclays Agg yield vs. duration

Source: Bloomberg Finance, L.P., as of July 31, 2020. Barclays Agg refers to the Bloomberg Barclays U.S. Aggregate Bond Index. Yield represented by yield to worst.

  • For decades, investors have turned to the 60/40 portfolio – 60% stocks and 40% bonds – to achieve complementary goals: Stocks generate capital appreciation while bonds provide balance in the form of capital preservation, diversification and income.
  • Today, however, the 40% portion of the portfolio may no longer be able to achieve its goals. In fact, because of the historically low starting point for yields, bonds have significantly more risk to the downside if rates rise compared to the limited degree of return potential if rates fall further.
  • The chart shows that the Barclays Agg’s yield moved steadily lower over much of the past two decades, with the decline accelerating in Q4 2018.1 At the same time, the Agg’s duration, which measures its sensitivity to changes in interest rates, began climbing in 2012. At approximately 6.4, the Agg’s duration is higher now than at any time during the past 20 years.1
  • In other words, traditional bonds today provide little to no yield and expose investors to more interest rate risk than at any time in the past two decades. If yields rose to where they began 2020, the Barclays Agg price decline would be roughly -7.3%, completely wiping out coupon returns.
  • Increasingly in today’s low rate environment, it appears investors may need to find alternative sources of income, diversification and capital preservation to play the role that traditional bonds did for decades.

  • Bloomberg Finance, L.P., as of September 30, 2020. Barclays Agg refers to the Bloomberg Barclays U.S. Aggregate Bond Index. Yield represented by yield to worst.

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