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  • Michael Livian, CFA and Martin Fridson, CFA

Why Now Might Be the Time to Invest in Bonds

Barron's Cover October 28, 2023
Barron's Cover October 28, 2023

This week, Barron's cover made a bold statement: "It's time to buy bonds". This comes at a time when many investors, perhaps including some of you, have felt the bite of dissatisfaction after an unprecedented 3-year bond bear market. But is now really the right time? Historical data and recent market trends say, "Yes".

Firstly, let's address the elephant in the room. The recent years haven't been kind to bond investors. Performance anxiety combined with market volatility has cast shadows over portfolios. But here's the silver lining: historically, after every dark period in the bond market, there has been a dawn of lucrative opportunities.

  1. BlackRock, a global investment giant, has done extensive studies on market patterns. Their findings have shown a consistent trend: when real interest rates are positive, subsequent bond market returns tend to skew significantly positive. This is not just a sporadic observation, but empirical evidence derived from decades of market data.

  2. Furthermore, the bond market has rarely witnessed a bear market stretch for three consecutive years. The mere fact that we are in uncharted territory should offer some solace. Past data indicates that after two-year bear stints, bond markets have typically rebounded with stronger returns. If history is any indication, we might be on the brink of a lucrative period for bond investments.

  3. The Bespoke Group, a market research firm, adds another layer to this outlook. They've identified a turning point in global monetary policy. For the past few years, we've seen an increasing number of central banks tightening their monetary policies. But, as of now, this trend is ceasing. In fact, the scale is now tipping towards central banks adopting an easing stance. The implications of this shift could be vast. If global trends are a precursor to domestic actions, the U.S. might soon see a policy easing. And the real game-changer? The anticipated hint from the Fed about a potential rate cut, which many experts predict might come as early as 2024.

But while we make the case for bonds, it's crucial to differentiate between types. Treasury bonds, backed by the U.S. government, are typically viewed as a safer bet compared to their more volatile counterpart - the lower-rated corporate bonds. The prices of Treasury bonds and investment grade corporate bonds have moved in opposite directions in about one out of five years over the past quarter century.

In conclusion, while the recent bond market may have tested your patience, now might be the time to hold steady, if not double down. The markets are ever evolving, and for those with a keen eye on trends and history, the message is clear: Don't lose hope. The bond market is ripe with potential, and the coming years might just be the boon that diligent investors have been waiting for.

So, if you've been wary, hesitant, or outright scared of investing in bonds, consider this your clarion call. The tide may be turning; make sure you're ready to ride the wave.


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