Yes, Bonds Could Still Rally, Even With Yields Below 1%
By Randall W. Forsyth – March 6, 2020
“Bond Yields Hit Record Lows” is a headline that has been used repeatedly as Treasury yields fall below previously unimaginable levels. First, the 30-year bond yield fell past 2%; then, in the past week, the benchmark 10-year note crashed through 1%.
A few market veterans also recall bond-market records at the opposite end, when long-term government securities topped 15% in the early 1980s. And even fewer stuck their necks out then to declare that, after more than three decades of rising yields and falling bond prices, investors should no longer shun bonds.
Long-term Treasuries also hold little allure for David Kotok, head of Cumberland Advisors. The yield on the S&P 500 index of 1.86%, he figures, ought to provide a return over the next three decades vastly better than the Treasury long bond, albeit with significantly more volatility.
Kotok doesn’t want to put all of his clients’ eggs in one basket, however. For their fixed-income portfolios, new money is being directed to cash, even though it will be earning only about 1%, rather than the 1.5% before the Fed’s 50-basis-point rate cut this past week. “It’s strictly valuation; I don’t want to own any 10-year bond yielding less than 1%,” given the risk of price declines from a reversal in yields, Kotok says.
Yet other bond veterans contend that insurance, rather than income, is the reason to own risk-free government securities. Robert Kessler, who heads the Denver-based asset manager bearing his name, says, “If you’re not hedging a portfolio with Treasuries right now, you’re just being silly.”
Read the full article with subscription at Barron’s (paywall): https://www.barrons.com/articles/bonds-could-rally-further-even-with-yields-below-1-51583542902