Should You Finally Consider Adding Bonds to Your Portfolio?
We are in “unprecedented” times; a “polycrisis.”
A pandemic, war in Ukraine, inflation, supply chain issues, an impending recession, high government debt, rising energy prices, climate issues, and political divide.
It may seem like we are facing many issues, but these have been ongoing for months. There’s almost nothing new to discuss.
One new topic to discuss is the rising short-term interest rates and falling financial markets.
The Federal Reserve has been raising the benchmark interest rate for the last few months. Since raising rates in March, the Fed has raised rates at each of the following meetings. And they will raise rates at their September meeting (September 20–21); it is widely accepted the rate increase will be 0.75%.
Interest rates are now at an elevated level. After years of being held near zero, they are finally above the Fed’s inflation target of ~2%. The only issue, inflation is now at 8%.
So the 2% interest you receive on your savings is still losing purchasing power in comparison to the current inflation rate.
Similarly, the 3% interest from government treasuries also loses purchasing power. But at least it provides investors with a small return, compared to stocks, which have tanked for all of 2022.
The black line represents the current interest rates from U.S. Treasury yields, the highest they have been in many years. Long-term and short-term treasuries are offering yields not seen in years.
Should You Buy Bonds?
There are, of course, many options when considering bonds. But for these purposes, we will only look at U.S. Treasuries.
While some of the longer-term treasuries can offer more than 3% for a decade(s), those are not what caught my attention. Not listed in the image above are the rates for 1-Month and 2-Month.