My Name Is Bond…

Never in the history of my investment experience that I had seen such mass enthusiasm on bonds. It is understandable as we are in a rising interest rate environment, which favours short-term treasury bills, and the fear of a coming real recession, which bode well for longer term bonds as a safe haven. Suddenly, what is seen as a boring financial instrument is now generating so much attention.

Here is an interesting trivia: Did you know that the global bond (or fixed income) market is larger than that of equities? In 2021, the global fixed income outstanding stood at United States Dollars (USD) 126.9 trillion while the global equity market cap was at USD 124.4 trillion¹. Though by a narrow margin, this would likely be widened in 2022 when the equity market cap is facing a downward pressure.

 

Bonds usually fill in the role of the counterweight to equities, and these two would form the most basic of investment portfolios. The weightage of both varies, but the oft quoted one is the 60/40 equities/bond ratio, which is still used as the benchmark standard.

 

The reasons why bonds are added to a portfolio mix are due to its differing correlation with equities, and the traditional go-to asset class during bad market days. However, the correlation notion has been challenged as bonds do display high positiveness with equities at certain points in time. A rising interest rate setting is not good for bonds (especially longer-term ones) as it would lose their demand if the coupon rates were lower than that of the prevailing interest rates.

 

Regardless of the macro intricacies of bonds, correlation and rates, an investment portfolio should last at least 10 years (my minimum timeframe) or more, and we do see the usefulness of bonds in providing some sort of safety net and volatility dampener. The other way would be to diversify further with more asset classes, as what The Bedokian Portfolio added with real estate investment trusts (REITs), commodities (gold, silver and oil) and cash, to make the whole correlation thing more varied.

 

To end off this short post, do remember that the bonds that I had mentioned here are good quality bonds, i.e., issued with investment-grade credit ratings, typical of good government and corporate bonds.

 

1 – Kolchin, Katie, et al. 2022 Capital Markets Fact Book. SIFMA. July 2022. https://www.sifma.org/wp-content/uploads/2022/07/CM-Fact-Book-2022-SIFMA.pdf (accessed 28 Aug 2022)