Why You Should Hold Bonds

The most recent pullback in equity prices due to uncertainty around COVID-19 has resulted in another leg lower for bond yields as investors clambered to gain exposure to the safety of fixed income products. The steady march lower in yields is once again prompting market participants to question how much lower yields can go, and whether investors with exposure to bonds are underestimating the risk inherent in fixed income should yields revert to more “normal” levels. This blog post from Movement Capital outlines some of the reasons why investors may want to be cautious of the long-term return prospects for fixed income in the current environment. While the arguments laid out in the blog post are valid, we would add that even though yields in this current environment may not be attractive from a long-term value perspective, there are still reasons to hold bonds in an investment portfolio. We would argue that the ability of bonds to act as a ballast for portfolio returns when equity markets come under stress signals that bonds still have a role to play in portfolio construction. An investment portfolio can own bonds, not for value reasons, but to help smooth the return profile of your portfolio in times of stress. We would also add that overvaluation concerns of the bond market have been ongoing for the last five years and yields have continued to grind lower.