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Is Now A Good Time to Buy Bonds?

Sweta Singh  |  May 31, 2023

Should we favor bonds as a core piece of our portfolios? A look at the benefits of an income stream provided by the bonds.

When your neighborhood bank is giving you risk-free Certificates of Deposit (CDs) at 5%+ rates, many people find themselves wondering: Is now still a good time to buy bonds?

At current rates, a 6-month CD could give you up to 5%. Because the Federal Reserve wanted desperately to fight inflation, the Fed raised their interest rates from 0% to 5% in only 14 months. This had the intended effect — inflation has been trending lower for many months now [inflation is currently at 4.6% as measured by Core Personal Consumption Expenditure (Core PCE, the Fed’s favorite measure for inflation, which strips out the more volatile price baskets of energy and food)]. 

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In Praise of The Stable Bond Portfolio

So why do we favor bonds as a core component of our portfolios, despite CD rates being as high as they are right now? Because while CDs can be a great short-term cash equivalent, they don’t provide a long-term income stream like a stable bond portfolio can.

The next question you may be asking yourself is: “Why are you bringing up inflation when discussing bonds?” Because macroeconomic indicators can give you a better sense of where the market is moving, and our current market data is telling a very mixed story right now. Bonds provide stability in uncertain market conditions, which is exactly where we find ourselves today. Stability is one of the main reasons many people consider buying bonds and making them a part of their portfolio. 

We all know someone in our lives or in our social media news feeds who claims to be able to perfectly timing the market; they buy at the valley and sell at the peak, perfectly. I wouldn’t be too worried if you don’t possess this superpower — neither do we (and really, no one actually does over a long enough time horizon). But even if you wanted to try and time the market right now, the volatility in the economic data makes the case for a bull or bear scenario just as likely.

Why You Can Never, Ever, Time the Market

For example, the Federal Reserve’s mandate is to bring core inflation down to 2% (we think 2% will be hard for the Fed to achieve, but it will almost certainly come down below 4.6%). Despite peskily high inflation, the job market is remarkably strong. Unemployment is at a multi-decade low of 3.4%. The American consumer remains strong, but the banking system is rattled. We’ve had two of the largest bank failures in our country’s history in the last quarter, and we don’t yet know where the fallout will land or when it will end.

So, are you willing to bet your portfolio on whether we’re headed into bear or bull territory?

Neither are we. That’s why we’re such strong proponents of bonds.

Bonds can be a ballast in your portfolio. They are hedges against market volatility, especially in scenarios like the one we’re in, where it’s hard to tell which way the market is likely to move. Bonds should provide you with stability and income.

As a rule of thumb, we endorse a “total return philosophy” of managing bond portfolios. That just means you should only take on risk when you’re getting paid to take on that risk (a sound philosophy we think extends well outside of investment decisions).

High and Stable Bonds For The Win

Instead of taking on massive risks in attempting to time the market, we counsel dollar-cost averaging with bonds (all that means is buying small amounts at regular time periods regardless of the price). I’m also partial to holding individual bonds rather than mutual funds or ETFs because owning individual bonds helps protect you against a herd mentality and the inherent volatility of these other instruments. You also control your own tax destiny by owning your securities. The next time you’re wondering if now a good time to buy bonds, remember that not all bonds are created equal: there are Short Term bond strategies (1-5 years), Limited Term (1-10 year) and Intermediate Term (1-20 years). 

I currently like the Limited Term bond strategy as an investment choice — both the corporate credit market and the municipal market are starting to look fair from a value perspective. High rates have boosted the yields (read: income) you can derive from both corporate bonds and municipal markets. And after years of low income from bonds, we can finally enjoy a reasonably high (and stable) dividend income stream for the investor over the next 3-5 years. It’s safe to say now is a good time to consider bonds. 


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