Investors should continue to treat bonds with caution even as the selloff bolsters the case for holding them in multi-asset portfolios, according to strategists at Goldman Sachs Group Inc.
While the past five years have been among the worst for bonds in a century, a sharp rise in yields is increasing their appeal, Goldman strategists including Christian Mueller-Glissman wrote in a note. The average yield on global government debt climbed to a 19-year high this week.
“We see a case for a return to more ‘normal’ strategic bond allocations but the tactical case for adding long-dated bonds is mixed,” they wrote.
See more: Long TIPS Yield 3%. Time to Buy?
The selloff is already tempting some big investors. JPMorgan Asset Management’s Bob Michele said Wednesday that his team has begun buying long-end US, Japanese, and Australian bonds, calling current prices “simply too cheap.”
Goldman says higher starting yields provide a cushion against further increases and should lift optimal bond allocations toward historical norms over a longer horizon.
In the shorter term, however, the energy shock and outlook for interest rates are likely to remain the key drivers for equities and bonds, Goldman argued, meaning higher bond allocations would likely add volatility to portfolios rather than act as a defensive buffer.
The firm remains overweight equities, neutral bonds and underweight credit in its asset allocation on a 12-month timeline.
“We think bonds are increasingly becoming a tool for income generation but less for risk mitigation, similar to the 100 years before the late 1990s,” according to Mueller-Glissman and colleagues.
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