Bond performance has improved, but volatility remains

Large monthly swings in core fixed income continue to rattle investors, calling into question its traditional role as a portfolio ballast.

Bloomberg Agg monthly and annual return

• The return of the “40” in the traditional 60/40 portfolio has been welcome news for investors as the Bloomberg Aggregate Index has generated attractive returns through much of this year driven by a steady decline in Treasury yields.
• Yet core fixed income’s revival has come with a significant catch: It carries significantly more volatility than it did just a few years ago, calling into question the Agg’s traditional role within a portfolio as a ballast against volatile equities. 
• Since the start of 2022, the Bloomberg Agg has moved an average of 2% per month, compared with an average of only 0.7% per month in 2015–2019.[1] Notably, the index return has been flat over the last five years (-0.01%) amid significant interest rate volatility.[1]
• Higher long-term yields suggest higher expected nominal returns, yet the volatility profile of bonds has been transformed by the Fed’s dual-sided monetary policy regime as policymakers have to balance maximum employment with price stability in a way that had largely been absent during the last several decades. Further, elevated inflation pressures may diminish core fixed income’s real return profile.
• Against this backdrop, the case for alternative sources of income as investors seek attractive growth and diversification potential continues to be attractive.

Catch up on chart of the week.

[1] Bloomberg Finance, L.P., as of November 30, 2024.

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