While equities declined this week, the major fireworks were happening in the bond market, both in the US and abroad.
In continuation of our series "What to do in a bear market," Yahoo Finance asked the experts to weigh in on what’s happening in fixed income and if the traditional 60/40 [equites/bonds] portfolio is dead or alive.
What just happened in bond market this week?
Earlier in the week, the British pound fell to a new low against the U.S. Dollar and the U.K.’s 2-year Gilt surged after Primer Minister Liz Truss announced a tax cut plan. A day later the Bank of England had to step in and buy long term bonds in order to avoid major turmoil in the markets.
The Bank of England was forced to step in and intervene by effectively limiting the margin call vicious circle and a very likely slaughterhouse in the domestic pension fund industry.
By mechanically forcing 30y yields down, they stopped the bleeding.
— Alf (@MacroAlf) September 29, 2022
“When you want to pursue fiscal, you have to issue more bonds, that is going to devalue your currency, then you have a big problem on your hands,” explained Emily Roland, co-chief investment strategist at John Hancock Investment Management.
Meanwhile, in the U.S., 10-year bond yields (^TNX) briefly topped 4% on Tuesday. The yields on treasuries move inversely with prices.
“Bonds globally do tend to move in sympathy. Some of the big reasons for the backup in bond yields we’ve seen here in the U.S. has been from foreign forces or foreign elements,” Roland told Yahoo Finance Live.
“We just saw the worst year in history so far for the aggregate bond index,” she added. “And the third worst start for a balanced 60/40 portfolio in history.”
Is the customary 60/40 [equities/fixed income] portfolio dead?
“We don’t think the 60/40 portfolio is dead. We want to own higher quality assets and equities as well as in fixed income,” said Roland.
Jay Hatfield, CEO of Infrastructure Capital Management agrees, depending on the investor.
“We would recommend investors include significant income in all portfolios including equity income securities as well as bonds. The exact allocation depends on the age and net worth of the investor,” he said.
However it's clear that diversified stock and bond portfolios have been “challenging for investors in 2022, as both stocks and bonds are under-pressure, an unusual occurrence in the last 30 years,” noted Rob Haworth, senior investment strategist at U.S. Bank Wealth Management.
Is this a time to invest in bonds? If so, which kind?
“Over the coming years, we anticipate a reversion to more normal correlations and cheaper assets should help diversified stock and bond portfolios. In the near-term, we remain cautious by holding less than normal stock exposures and tilting toward assets with higher current cash flows, such as infrastructure and shorter maturity, high-quality bonds,” said Haworth.
Ines Ferre is a markets reporter for Yahoo Finance. Follow her on Twitter @ines_ferre