Bonds are the bedrock of the balanced portfolio – the 40% of the classic 60/40.
The case for owning them is twofold
- as an offset to falling equities
- for the income, or yield
But in an inflationary environment, neither of these stands to reason.
First, let’s look at the ability of bonds to act as an offset to falling equities – as they have done in previous market crises.
The chart below demonstrates that bonds are very unlikely to do this job in the future. The blue bars illustrate how far yields must fall to offset a 10% decline in equity markets for a 60/40 portfolio.
From this point, with yields as depressed as they are, bonds have run out of the road required to effectively defend portfolios in the event of a sell-off.
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