The past 30 years, thus, have contrasted sharply with the stagflationary 1970s, when bond yields skyrocketed alongside higher inflation, leading to massive market losses for bonds.īut inflation is also bad for stocks, because it triggers higher interest rates – both in nominal and real terms. The decline of inflation rates from double-digit levels to very low single digits produced a long bull market in bonds yields fell and returns on bonds were highly positive as their prices rose. Over the past three decades, bonds have offered a negative overall yearly return only a few times. Sign up for The Gleaner’s morning and evening newsletters. Owing to higher inflation and inflation expectations, bond yields have risen and the overall return on long bonds reached negative 5.0 per cent in 2021. Consider that any 100-basis-point increase in long-term bond yields leads to a 10 per cent fall in the market price – a sharp loss. When inflation rises, returns on bonds become negative, because rising yields, led by higher inflation expectations, will reduce their market price. Similarly, when the economy is booming, stock prices and bond yields tend to rise while bond prices fall, whereas in a recession, the reverse is true.īut the negative correlation between stock and bond prices presupposes low inflation.
The rationale is that stocks and bond prices are usually negatively correlated – when one goes up, the other goes down – so this mix will balance a portfolio’s risks and returns.ĭuring a risk-on period, when investors are optimistic, stock prices and bond yields will rise and bond prices will fall, resulting in a market loss for bonds and during a risk-off period, when investors are pessimistic, prices and yields will follow an inverse pattern. The traditional investment advice is to allocate wealth according to the 60-40 rule: 60 per cent of one’s portfolio should be in higher-return but more volatile stocks, and 40 per cent should be in lower-return, lower-volatility bonds.
Rising inflation in the United States and around the world is forcing investors to assess the likely effects on both ‘risky’ assets, generally stocks, and ‘safe’ assets, such as US Treasury bonds.
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