The 5% World

The 5% World

As investors fear the Fed will continue raising interest rates well into this year, bond yields are falling, which means they can once again protect the rest of your portfolio, writes Jason Zweig in an article for The Wall Street Journal. Long-term Treasurys dropped roughly 5% in February, with the bond market in general off about 3%. That could be good news for both investors who use bond funds for income and those that utilize bonds as a way to keep stocks and other assets steady.

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But investors may need to change their thinking on bonds, Zweig contends. In the past, severely low interest rates pushed bonds to become an asset that garnered capital gains, similar to stocks. But 2022—one of the worst year ever for bonds—created rising yields as prices plummeted. And while it would be foolish to think that there won’t be further losses on bonds as long as the Fed keeps raising rates, embracing the high yields on high-quality bonds instead of seeking out “alternative income” could insure steady income for years to come, with 20-year TIPS offering a return of over 1.6% above inflation.

There are many on Wall Street who pedal the belief that investors must take extra risk—and shell out high fees—to get extra income, but short-term Treasurys that yield 5% dispels that idea. And those high yields on good fixed-income assets make it safer to take risks elsewhere in your portfolio, Zweig maintains. If those riskier assets generate positive returns, that’s a bonus, but if they lose all their value, investors in a 20-year TIPS who hang onto it would still finish ahead because of the securities’ guaranteed growth. Zweig points to the “risk reduction calculator” on that can show you how much allocation you should give to safe and risky assets and for how long.

Rising interest rates will also likely bolster funds that invest in commodities and futures contracts, as they tend to generate returns from market fluctuations, last month’s contract sales for higher than the cost of next month’s, and the income from interest on the cash collateral the funds used to stake their positions. That collateral return is currently at roughly 5% due to elevated interest rates, giving commodity funds a tailwind that could keep them boosted for a while if inflation remains high, Zweig concludes.


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