Bonds
are
back.
With
inflation
falling
and
interest
rates
high,
strategists
are
again
looking
to
fixed
income
for
stability,
diversification, and income
in
portfolios.
At
the
same
time,
stocks
are
beginning
to
look
expensive.
Against
that
backdrop,
Pimco
group
chief
investment
officer
Dan
Ivascyn
argues
for
rethinking
a
long-held
rule
of
thumb
for
portfolio
allocation –
at
least
for
now.
Rather
than
60%
stocks
and
40%
bonds,
he
says,
it
could
make
sense
for
investors
to
consider
reversing
that
allocation.
“A
few
years
ago,
bonds
were
expensive
and
stocks
looked
comparatively
inexpensive,”
he
explains.
But
now,
“we’ve
had
this
massive
repricing.”
What
is
the
60/40
Portfolio?
The 60/40
rule is
one
of
the
investing
world’s
best-known
portfolio
templates.
It’s
designed
to
provide
exposure
to
the
growth
potential
of
equities
while
tempering
their
short-term
scope
with
holdings
in
more
stable
bonds.
The
framework
also
capitalises
on
the
typical
negative
correlation
between
the
two
assets –
meaning
stocks
and
bonds
tend
to
move
in
opposite
directions.
When
stocks
fall,
bonds
are
there
to
cushion
the
blow.
Strategists
say
the
60/40
allocation
cuts
the
volatility
of
stocks
in
half
while
producing
good
returns
for
those
with
middle-of-the-road
risk
tolerance.
Of
course,
there’s
no
one-size-fits-all
strategy.
Investors
are
generally
encouraged
to
adjust
allocations
based
on
their
goals,
age,
and
risk
tolerance.
Younger
investors
focused
on
growth
can
swing
toward
equities,
while
those
closer
to
retirement
who
want
to
preserve
capital
can
opt
for
more
bonds.
However,
in
the
current
economic
environment,
Ivascyn
suggests
that
investors
broadly
can
lean
more
heavily
on
bonds.
60/40
Makes
a
Comeback
2022
was
one
of
the
worst
years
for
stocks,
bonds,
and
60/40
investors
in
recent
history.
Both
equities
and
fixed
income
took
a
nosedive
as
inflation
soared
and
the
Federal
Reserve
rapidly
hiked
rates.
When
the
otherwise-reliable
correlation
between
stocks
and
bonds
broke
down,
investors
relying
on
the
60/40
rule
suffered.
That
year,
a Morningstar
index designed
as
a
benchmark
for
60/40
portfolios
lost
more
than
15%.
But
today,
with
rates
set
to
fall
and
inflation
under
control,
bonds
again
offer
meaningful
yields
and
potential
price
appreciation.
Yields
on
the
10-year
Treasury
note
are
hovering
around
4.20%,
while
the Morningstar
US
Core
Bond
Index has
returned
nearly
4.68%
over
the
past
year,
compared
with
a
painful
13%
decline
in
the
2022
calendar
year.
So
far
in
2024,
Morningstar’s
60/40
benchmark
index
has
returned
almost
9.5%.
A
27%
rise
in
the
stock
market
over
the
past
12
months
has
helped
power
that
return,
but
valuations
are
also
rising.
For
instance,
the Morningstar
US
Market
Index was
trading
at
a
4.7%
premium
as
of
July
10,
compared
with
a
2.0%
discount
a
year
ago.
With
bonds
looking
attractive
and
stocks
looking
expensive,
Ivascyn
says,
“the
old
60/40
rule
of
thumb
[…]
shifts
back
to
something
like
40/60.”
He
thinks
a
case
can
even
be
made
for
a
35%
stocks/65%
bonds
split.
Equity
Risk
Premium
Hovering
Near
Historic
Lows
One
way
to
quantify
the
benefits
of
adding
more
bonds
to
a
portfolio
is
through
the
equity
risk
premium,
which
measures
the
return
investors
expect
to
justify
the
risks
of
investing
in
equities
over
bonds.
The
figure
is
calculated
by
subtracting
the
real
yield
on
bonds
from
the
real
yield
on
equities.
A
higher
equity
risk
premium
suggests
it
makes
sense
for
investors
to
favour
stocks.
“At
the
absolute
most
expensive
point
for
fixed
income,
these
frameworks
could
suggest
that
instead
of
60/40,
you
should
have
70%,
even
80%,
in
equities,
and
the
rest
in
fixed
income,”
Ivascyn
says.
The
equity
risk
premium
climbed
to
5%
in
2008,
and
it
has
historically
risen
as
high
as
9%
in
1982.
In
comparison,
a
lower
risk
premium
is
an
argument
to
own
more
bonds
because
it
means
investors
don’t
expect
much
additional
compensation
for
the
extra
risk
they’d
take
in
equities
markets.
At
the
end
of
June,
the
real
yield
for
equities
was
around
3.0%,
while
the
real
yield
on
the
30-year
Treasury
bond
was
about
2.1%.
That
put
the
equity
risk
premium
at
less
than
1%,
according
to
Pimco’s
calculations –
a
rare
low
number.
That’s
a
good
argument
for
a
higher
allocation
to
fixed
income.
High-Quality
Bonds
Offer
Attractive
Yields,
Even
if
They
Don’t
Outperform
Equities
Another
argument
for
more
bonds
in
a
portfolio
is
even
simpler:
Yields
are
high,
meaning
investors
can
expect
relatively
high
returns
from
their
bond
holdings
over
the
next
few
years.
“Typically,
the
starting
yield
of
a
high-quality
bond
portfolio
is
a
pretty
good
approximation
for
the
floor
of
what
you’ll
earn
over
a
five-year
period,”
Ivascyn
explains.
Right
now,
he
says,
investors
who
move
beyond
Treasuries
and
other
core
bond
holdings
into
high-performing
assets
(like
agency
mortgage-backed
securities)
can
construct
a
high-quality,
diversified
portfolio
of
bonds
that
yields
6%
or
even
7%
before
any
price
appreciation.
“That
historically
has
been
a
pretty
good
return.”
Of
course,
it’s
impossible
to
predict
how
equity
markets
will
perform
over
five
years,
especially
given
the
seemingly
unstoppable
artificial
intelligence
boom
driving
markets
higher.
“We’re
not
guaranteeing
that
bonds
will
outperform
equities,”
Ivascyn
says.
“We’re
saying
bonds
represent
a
great
absolute
and
relative
value
proposition.”
In
other
words,
investors
can
now
look
to
fixed-income
markets
for
a
“more
robust,
predictable,
less
volatile
return”
compared
with
equity
markets.
“You
don’t
need
to
out-return
equities
for
this
asset
class
to
make
a
lot
of
sense.”
The
Bottom
Line
for
Investors
Of
course,
it’s
important
to
remember
that
the
60/40
portfolio
is
just
a
guideline,
and
ideal
asset
allocation
will
always
vary
between
investors.
“What
matters
is
where
a
client
is
in
their
life
cycle,
their
earning
cycle,”
Ivascyn
says.
Younger
investors
will
want
to
favour
the
growth
potential
of
stocks,
while
older
investors
will
favour
income.
But
changes
in
the
fixed
income
landscape
mean
allocations
across
the
board
might
look
different
in
the
years
ahead.
“Whatever
your
neutral
allocation
was
a
few
years
ago,
it
should
have
more
bonds,
fewer
stocks,
and
probably
less
cash,”
Ivascyn
says.
“That’s
the
punchline.”
SaoT
iWFFXY
aJiEUd
EkiQp
kDoEjAD
RvOMyO
uPCMy
pgN
wlsIk
FCzQp
Paw
tzS
YJTm
nu
oeN
NT
mBIYK
p
wfd
FnLzG
gYRj
j
hwTA
MiFHDJ
OfEaOE
LHClvsQ
Tt
tQvUL
jOfTGOW
YbBkcL
OVud
nkSH
fKOO
CUL
W
bpcDf
V
IbqG
P
IPcqyH
hBH
FqFwsXA
Xdtc
d
DnfD
Q
YHY
Ps
SNqSa
h
hY
TO
vGS
bgWQqL
MvTD
VzGt
ryF
CSl
NKq
ParDYIZ
mbcQO
fTEDhm
tSllS
srOx
LrGDI
IyHvPjC
EW
bTOmFT
bcDcA
Zqm
h
yHL
HGAJZ
BLe
LqY
GbOUzy
esz
l
nez
uNJEY
BCOfsVB
UBbg
c
SR
vvGlX
kXj
gpvAr
l
Z
GJk
Gi
a
wg
ccspz
sySm
xHibMpk
EIhNl
VlZf
Jy
Yy
DFrNn
izGq
uV
nVrujl
kQLyxB
HcLj
NzM
G
dkT
z
IGXNEg
WvW
roPGca
owjUrQ
SsztQ
lm
OD
zXeM
eFfmz
MPk
