
Bonds Are Back: The Return Of Positive Real Yields
September 26, 2023
Bonds Are Back: The Return Of Positive Real Yields
The investment landscape is experiencing a significant shift. For the first time since 2009, we’re seeing positive real yields in the bond market.
That means the interest one receives on a bond is sufficient to match inflation plus provide additional returns.
Inflation has dropped to around 3%, and bonds are paying 5%—meaning the real return stands at approximately 2% in the U.S. This shift provides investors an alternative growth channel they didn’t have before: bonds that keep up with inflation.
And that’s a pretty big deal.
“So… should I be investing in bonds or stocks?”
Historically, one of the primary reasons for investing in the stock market (alongside or sometimes in lieu of bonds) was the prospect of higher real positive returns that bonds couldn’t provide in the long term. In fact, for many years, the acronym TINA (There Is No Alternative) dominated the investment narrative surrounding stocks. This sentiment drove many (including those in retirement with a more conservative risk profile), toward stocks as the only viable option for a real return.
Looking at the equity risk premium (ERP)—the excess amount one can expect to be compensated by investing in stocks rather than a risk-free rate (treasury bonds)—it was clear that bonds weren’t cutting it.
However, with the emergence of positive real yields from bonds, a new acronym, TARA (There Are Real Alternatives), is changing the conversation. The current ERP, hovering around the mid-2% range, suggests that the excess return for braving the volatility of stocks isn’t as lucrative as the historical average of 4 to 4.5%.
So the real question is, “Am I being compensated enough to take on the volatility of stocks compared to the risk-free rate I can get with bonds?”
Things to Consider:
As with most financial decisions, there are multiple factors to consider before altering your course. Here are the facts:
- You’re now being compensated more for conservative asset classes than in the past.
- The stock market has appreciated over the last eight months.
- Like any moment in time, the stock market could turn in the wrong direction.
- Inflation could increase again and eliminate the positive real yields from bonds.
For those with a well-defined plan, it might make sense to rebalance your portfolio. If you’ve allocated risk properly, your stocks have likely appreciated recently, while your bonds might have depreciated. But now that bonds are offering a positive real return, it makes sense to give them a little more consideration in your portfolio.
That doesn’t mean you should write off (or should we say, sell off) your stocks entirely; the adage “stocks for the long run” still holds water. The market is bound to shift eventually (as it always does), and taking the chance to rebalance your portfolio after stocks have appreciated and bonds are offering positive real yields could be a valuable defense strategy that pays off later.
The Bottom Line
The financial landscape is dynamic, and staying informed is key. As investment opportunities evolve, it’s crucial that your portfolio aligns with your risk tolerance and goals, and that you’re prepared for a variety of scenarios—not just the current one.
If you’d like to know more about what’s going on in the markets or you have questions about your portfolio, we’d be happy to chat with you. Schedule a consultation with us here or give us a call.