It's tempting to want to avoid bonds after their poor run so far in 2022. In fact, the opposite may be true, especially if you're optimistic on inflation trends.
Oil Prices Surge To Three-Year Highs After Hurricanes And Unexpected Demand—How Much Higher Can They Go?As much as bonds haven’t fared well in many cases, they have still outperformed stocks. At the time of writing, the S&P 500 is off almost 20% for the year, so losses in stocks have exceeded those in bonds, broadly speaking. Of course, that’s little comfort when both returns are negative.
Also, higher yields offer a little more protection from price swings. If a bond is paying you 4% interest and falls in price, you have a little more cushion for price falls before you lose money than with yields at 1%. . If that’s true, then the Fed may want to cut rates to stimulate growth. That could cause higher quality bonds to outperform.In recent years it may have made sense to avoid or limit bond exposure as yields were so meagre. However, that’s now changing. The yield on the 10-year U.S. Treasury is now back to levels we haven’t seen in well over a decade. Of course, high inflation means that the real yield on bonds is still negative currently so there’s no free lunch.