What Are Bonds and What Role Should They Play in Your Portfolio?
By: Steve Smith
Concerns that the Corona Virus is threatening to send the global economy into a recession has started a flight into the safety of bonds. The yield on the U.S. 10Year note has now dropped below 1.4%, — it’s lowest level in over two years, signaling that the GDP might turn negative over the next quarter if factories and supply chains don’t re-open.
Most investors understand the need to have a portfolio that is diversified between stocks, bonds, and other assets. The safety of bonds has caused investors to pour inordinate amounts of money into bonds, both government and corporate, which in turn had driven rates even lower, helping prop up stock prices. Thanks to this liquidity provided by Central Banks, it has created a self-filling feedback loop.
Most pension and mutual funds—which means by extension individuals— have a mandate to hold a certain percentage of bonds in their portfolio. Now, when inflation is taken into account, the real return of most government-issued bonds is now zero, or in some cases negative.
With so much money in the… Continue reading at Stock News