FINANCIAL FOCUS
KRISTI TREVINO Financial Advisor Edward Jones
With Ultra-low Rates , Should You Still Invest in Bonds ?
If you ’ ve been investing for many years and you ’ ve
owned bonds , you ’ ve seen some pretty big changes on your financial statements . In 2000 , the average yield on a 10-year U . S . Treasury security was about 6 %; in 2010 , it had dropped to slightly over 3 %, and for most of 2020 , it was less than 1 %. That ’ s an enormous difference , and it may lead you to this question : With yields so low on bonds , why should you even consider them ?
Of course , while the 10-year Treasury note is an important benchmark , it doesn ’ t represent the returns on any bonds you could purchase . Typically , longerterm bonds , such as those that mature in 20 or 30 years , pay higher rates to account for inflation and to reward you for locking up your money for many years . But the same downward trend can be seen in these longer-term bonds , too – in 2020 , the average 30-year Treasury bond yield was only slightly above 1.5 %.
Among other things , these numbers mean that investors of 10 or 20 years ago could have gotten some reasonably good income from investment-grade bonds . But today , the picture is different . ( Higheryield bonds , sometimes known as “ junk ” bonds , can offer more income but carry a higher risk of default .)
Nonetheless , while rates are low now , you may be able to employ a strategy that can help you in any interest-rate environment . You can build a bond “ ladder ” of individual bonds that mature on different dates . When market interest rates are low , you ’ ll still have your longer-term bonds earning higher yields ( and long-term yields , while fluctuating , are expected to rise in the future ). When interest rates rise , your
maturing bonds can be reinvested at these new , higher levels . Be sure you evaluate whether a bond ladder and the securities held within it are consistent with your investment objectives , risk tolerance and financial circumstances .
Furthermore , bonds can provide you with other benefits . For one thing , they can help diversify your portfolio , especially if it ’ s heavily weighted toward stocks . Also , stock and bond prices often ( although not always ) move in opposite directions , so if the stock market goes through a down period , the value of your bonds may rise . And bonds are usually less volatile than stocks , so they can have a “ calming ” effect on your portfolio . Plus , if you hold your bonds until maturity , you will get your entire principal back ( providing the bond issuer doesn ’ t default , which is generally unlikely if you own investment-grade bonds ), so bond ownership gives you a chance to preserve capital while still investing . But if the primary reason you have owned bonds is because of the income they offer , you may have to look elsewhere during periods of ultra-low interest rates .
For example , you could invest in dividend-paying stocks . Some stocks have long track records of increasing dividends , year after year , giving you a potential source of rising income . ( Keep in mind , though , that dividends can be increased , decreased or eliminated at any time .) Be aware , though , that stocks are subject to greater risks and market movements than bonds .
Ultimately , while bonds may not provide the income they did a few years ago , they can have a place in a long-term investment strategy . Consider how they might fit into yours .
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