Are Bonds A Good Investment Right Now?
By John Stanton
As an investor, you have many options. Would you choose an investment that is guaranteed to produce a loss? Likely not. That defeats the whole purpose of investing.
Yet right now, there are thousands of investors doing just that. It makes me wonder, of all the investment alternatives out there, why do investors pick an alternative that is guaranteed to produce a loss?
Some Bonds Are Paying Negative Yields
Right now, $13 trillion of global investment-grade corporate and government bonds are paying a negative yield. What that means is that $13 trillion out of $100 trillion bonds worldwide (1) are owned by investors who will lose money by holding their bonds to maturity. That is a full 13% of bonds worldwide.
And this phenomenon is not just occurring in other countries. U.S. investors are now feeling the pain of negative yields as well. A good example is the 10-year U.S. Treasury. We saw its yield decline from 3.25% last October to under 1.5% as of August 28, 2019.
Why Is This Happening?
If investments, and therefore bonds, are supposed to make you money, then what is happening? Why are they paying negative yields?
Some of the drop in yields can be attributed to the change in policy from the Federal Reserve. After steadily raising rates since December 2015, they lowered rates this past July. While they are trying to protect the U.S. economy, lowering rates causes bond yields to decline.
Part of the fall in U.S. bond yields is due to the closing of the difference in yields between U.S. interest rates and interest rates of countries in the rest of the world.
Finally, demand for bonds has increased. Stagnant growth since the Great Recession in much of the global economy outside of the U.S. has increased demand for conservative assets. Increased demand for bonds usually results in higher prices and lower yields.
Who Owns These Bonds?
So, if owning these bonds means you’ll lose money, who would purchase them? Who would purchase an investment if they know they will lose money on it?
Well, it may be you. Do you own a bond fund or bond ETF? If you take a look at what is owned inside those funds, you may find the underlying negative-yielding paper that we are talking about. For example, the Bloomberg Barclays Global Aggregate Bond Index has a market capitalization of $50 trillion, with more than 23,000 individual issues, or bonds. A full 20% of the index has a negative yield to maturity when weighted by market cap.
Often, employer-sponsored retirement plans such as a 401(k) or a 403(b) offer fixed-income investments that may hold paper that pays less than 0. These kinds of retirement plans have a limited menu of investment choices, and nearly all include index funds. These index funds are where you will likely find negative-yielding bonds.
Do you own any “Target Date” or LifeStage funds? You may own some of these negative-yielding bonds within your fund. They usually include fixed-income exposure, most often by utilizing a passive global index.
Should You Own Bonds?
How can you avoid owning investments that are guaranteed to cost you? If 13% of bonds have a negative yield and are found in so many of the common bond and mixed investment funds, is there any safe way to invest in bonds? Or should you avoid them altogether to preserve your investments?
You should not avoid all bonds just because of the current negative yields. Bonds are an important component of a prudent portfolio. They serve as a stabilizer during volatile markets and as a placeholder for assets during a slowing economy.
With this part of your portfolio, though, you should be getting a positive return, not negative. You also need to know when your principal will be paid back on your bond investments. Low interest rates are here to stay, at least for the immediate future. As such, you need to be extra careful with your bond investments to make sure they are fulfilling your investing purposes.
While passive index investing is popular, in our current environment, it isn’t safe to simply passively invest in bonds. With 13% paying negative yields, now is the time to work with an experienced investment professional to make sure you aren’t wasting your hard-earned money.
If you have questions about your bond investments or would like a portfolio review, we at The Stanton Group are here to help. Schedule a call online today or email me directly at JStanton@seacrestwm.com.
John Stanton is the Wealth Advisor at The Stanton Group WP | SeaCrest Wealth Management, LLC. With more than three decades of experience in the financial services industry, he serves as an advisor for clients, focusing on financial planning and the investment strategies to support their financial plan. Based in Naperville, Illinois, John serves clients in Naperville, Plainfield, Darien, and throughout the state. Learn more about John’s services by visiting www.stantongwp.com or connecting with him on LinkedIn. You may reach John Stanton at 630-445-2380 or email JStanton@seacrestwm.com.
The Stanton Group WP provides investment advisory services through SeaCrest Wealth Management, LLC (the “SWM”), a registered investment advisor. SWM is a registered investment advisor (“RIA”) with the U.S. Securities and Exchange Commission located in the State of New York. SeaCrest Wealth Management, LLC can be reached at (914) 502-1900.
(1) Data from the Bank of International Settlements estimated the total market value of all outstanding bonds worldwide to be $100 trillion as of December 31, 2017.