Bonds, Baby!

Bill Parrott |

Is it time to buy bonds? The Federal Reserve interest rate hikes decimated bonds, wiping out years of gains, and if you own bonds, you feel the pain. Long-term government bonds lost money for five years, while stocks produced stellar profits. Over the past decade, the S&P 500 is up 221%, and bonds have risen a paltry 15%, with dividends. If we removed the income, bonds lost more than 11%. Long-term bonds crashed 26% last year, the worst performance in over one hundred years – hardly a ringing endorsement to buy bonds.

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Why buy bonds if they performed poorly? Good question. The Wall Street consensus believes the Federal Reserve will stop raising interest rates soon, and Jeffrey Gundlach, CEO of Doubleline Capital, thinks they won't raise rates again this year. If true, interest rates could stabilize or even fall, a bond benefit.

The Federal Reserve hiked rates by 100% from February 1994 to February 1995, and bond prices dropped by 7.8%. In July 1995, they lowered rates, and bonds soared 31.7%. The Fed raised rates again in 1999 and 2000, and bonds fell 9%,  but they lowered them in 2001 and 2002, launching a massive bond rally that lasted several years. From 2000 to 2009, long-term bonds jumped 118%, while the S&P 500 fell 34%.[1]

Bond yields are substantially higher because prices have declined and are approaching a level not seen in over a decade. The current yield on Vanguard's Long-Term Bond ETF (BLV) is 4.27%, an increase of 64% from last year's low. US T-Bills did not produce any income during COVID-19 now yield more than 5.5%, and corporate bonds routinely pay more than 5% and 6%. The higher income gives the patient investor a reason to buy bonds; you're getting paid to wait.

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Has the Federal Reserve finished raising interest rates? I don't know, but I doubt rates will climb more than 3,000% from current levels as they did during COVID-19. It's possible rates can rise more, but I believe the risk-reward ratio now favors the bond buyer since prices are depressed and yields are higher, especially if the Fed has completed its mission. It could be a classic buy low, sell high strategy.

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1994 was my first experience with rate hikes, and it was not fun as I watched bond portfolios fall, but it allowed me to buy them at substantial discounts. Investors who purchased bonds as they fell saw their portfolios increase when prices recovered. The combination of higher income and rising bond prices generated significant capital gains. I hope history repeats itself.

Bye-bye, and buy bonds!

Nobody likes high interest rates. ~ Chanda Kochhar

September 15, 2023

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren't suitable for every investor. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.


[1] Dimensional Funds Returns Web Tool