Don’t Give Up on Bonds

Bonds’ ability to zig when stocks are zagging is especially useful when markets are in “risk-off” mode.

Dan Lefkovitz 1 June, 2021 | 1:31AM
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Bond Yield Rising 

"Don't own bonds." The blunt warning from hedge fund guru Ray Dalio in November 2020 looks obvious in retrospect. Rock-bottom interest rates designed to stimulate pandemic-stricken economies had nowhere to go but up. In early 2021, Canadian 10-year Treasuries nearly doubled—from roughly 0.80% to 1.5% in just two months. The yield on the 10-year U.S. Treasury rose from 1.0% to 1.7% over the same span. Those rising yields undermined bond prices, including a long-term Canadian federal bond that lost 13% of its value in the first quarter of 2021.

As a result, core bond portfolios took it on the chin. As displayed in Exhibit 1, the Morningstar Canada Core Bond Index, which represents the investment-grade credit market for Canadian fixed-income investors—including debt issued by federal and provincial governments, corporates, and government-guaranteed entities like the Canada Housing Trust—lost 5.4% of its value in the first quarter of 2021. Meanwhile, the Morningstar Global ex-Canada Core Bond Index declined 2.6% in Canadian dollar terms. Those are steep short-term losses for an asset class that is considered relatively safe. Meanwhile, equities rallied.

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About Author

Dan Lefkovitz

Dan Lefkovitz  Dan Lefkovitz is a strategist for Morningstar's Indexes group.

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