February 7, 2022
Q. Is now a good time to buy bonds?
A. Short answer, yes, I do believe it is, for two reasons:
It is good portfolio diversification
We think the inverse relationship between rising rates and bond prices are already priced in.
Now let me take a step back to answer this question with more data (and of course with some fun charts). When interest rates rise, bond prices fall. That’s because when interest rates increase you can get a higher paying coupon at par and your existing bonds aren’t as attractive unless you offer them at a lower price. This is so that the ultimate total yield (coupon + price appreciation) is comparable. That is why you may be hearing on the news that bond yields are increasing, but on your investment statement, you see that bond prices are falling.
Over the past year the Barclays US Aggregate Bond Index has fallen about 3.03%, but if you measure from March 18 of 2021 to January 28 of 2022, prices have actually been flat.
Now let’s take a bigger picture view - over the past 25 years. Over that period, the target Fed rate increased in 1997-mid-2001, 2003, 2005, 2006, and 2017 - 2018. Notably, in my opinion, it appears to be more the fear of rising interest rates, than the actual rising interest rates. Looking at history (which we can never guarantee, but still tells a story), I would lean on the fact that bond prices have already been impacted.
Now let's look at the same 25-year historical data for the S&P 500 Index. Notice that the S&P did not start to show negative returns for the first two years of the 1997 - mid-2001 rate increase, 2003 had no significant reaction, 2005 saw a smaller return, 2006 the index was up, and it wasn’t until the second year of increases that the S&P reflected a negative return for the 2017 - 2018 target rate increases. As always, I want to state, we can’t guarantee any of this, but we do feel that market characteristics tell a story.
Want to hear from others that feel 2022 is going to be a growth year economically speaking? Watch this video from CNBC: Jamie Dimon sees the best economic growth in decades, more than 4 Fed rate hikes this year (cnbc.com)
You can also refer to our checklist: 2022 - What Issues Should I Consider When Reviewing My Investments?
Do your friends ask you financial questions?
Pass those questions on to us at AskRPG@rootedpg.com and we will feature them in our future newsletters under this section.