- Bonds have bounced back as a source of income, but the degree of ballast and stability that they’re able to provide in portfolios remains in question.
- Continued inflation uncertainty may require a new playbook for portfolio diversification than what was needed in recent decades.
- Alternative diversifiers like the BlackRock Systematic Multi-Strategy Fund (“SMS”) can complement traditional bonds by providing an added source of diversification and return in portfolios.
Transitioning into the post-COVID investment environment shifts the foundations of portfolio construction that investors relied on in recent decades. On full display in 2022, inflation and recession risk punished both bonds and stocks together to historic declines. Now, market dynamics appear to have shifted in favor of traditional asset classes. The idea that ‘bonds are back’ to their long-held role in portfolios has become the dominant market view for most investors.
Bonds have certainly bounced back in their ability to generate income, but if uncertainty in the inflation outlook persists, the degree of ballast and stability that they can provide remains in question. The idea that ‘bonds are back’ misses important nuances to the current economic and policy backdrop that may require a new playbook for portfolio diversification.
Bonds are back(?)
Low volatility, reliable ballast, and high income—these were hallmarks of the “old” fixed income that made bonds a trusted source of diversification and return in portfolios. The ‘bonds are back’ narrative, however, should recognize that to truly be “back,” all three of these characteristics need to return. Yet, only one has income. Yes, there is now an alternative and investors can finally access attractive yield in fixed income. But the idea of fixed income is the “insurance that pays for itself” with consistent yield AND reliable ballast has yet to be fully restored.