Bonds finally reclaim their portfolio crown

🗝️ Key Points

• This is The Takeaway from today's Morning Brief, which you can sign up to receive in your inbox every morning along with: Working-age investors can hardly be blamed for zeroing.
• For years, setting that portion of an investment pie to the smallest of slivers was like living on the wild side, albeit from the quiet safety of clicking behind a screen.
• The vaunted 60/40 portfolio — the allocation percent of stocks and bonds — felt almost an anachronism.

This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every morning along with:

Working-age investors can hardly be blamed for zeroing out their bond allocations.

For years, setting that portion of an investment pie to the smallest of slivers was like living on the wild side, albeit from the quiet safety of clicking behind a screen.

The vaunted 60/40 portfolio — the allocation percent of stocks and bonds — felt almost an anachronism.

After central banks around the world lowered rates to climb out of the global financial crisis, suppression made bonds less attractive for many investors. The Fed’s inflation-fighting campaign of the COVID era fueled further bond aversion as yields soared.

But bondholders over the past year have enjoyed a powerful run. The 60/40 could even be back.

Last year graced bonds with the best market performance since 2020. And while this year poses different economic conditions — from a stabilization of US trade policy to perhaps a quieter Fed — investors are giving bonds a fresh look.

“The 2020s have been a trying time for fixed income investors,” wrote DataTrek co-founder Nicholas Colas in a note to clients this week. “Many funds with +10-year average maturities have lost money decade to date.”

But now, Colas added, “Our view is that the worst has passed.”

Bond yields have stabilized from years of historic market and policy storms, resetting to a new normal that reflects rational views of the future. That even opens the once far-fetched possibility, Colas said, of bonds outperforming stocks.

There’s also a “new year, new me” dynamic playing out, where all sorts of traders and institutions are trying on new looks and personalities for their portfolios, tweaking the levels of gold and bitcoin, for instance, to match this dizzying moment.

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In a world where you can win thousands of dollars or more by wagering on whether the US will take control of parts of Greenland or Canada, for example, the limited upside and safety of bonds might seem tiresome or even absurd.

But geopolitical realignment, new fiscal policies, and a near-constant stream of market-moving events make the case that now is an interesting time — for everything.

Perhaps the bigger takeaway from the bond resurgence then isn’t a bond-centric trading agenda, although others might stop there. Instead, it might merely be turning away from chasing winners and embracing a new kind of diversification.

Diversification lacks the irresistibility of a meme stock on the upswing, or the pizzazz of the newest facet of the AI trade. But it’s battle-tested. And it does the job. Especially, or perhaps most importantly, when things go south. Maybe the 2.0 version even has bitcoin and gold in a small dose, if that fits your personality.

And then one day those diversifications just might go to work as hedges — rather than a way to get rich on a winner.

“If and when there is an economic slowdown or recession, we expect yields will decline,” Colas wrote. “Bonds will then, once again, earn their keep.”

Hamza Shaban is a reporter for Yahoo Finance covering markets and the economy. Follow Hamza on X @hshaban.

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