Gateway Financial Partners



June 2024 | Monthly Economic Update

As the Federal Reserve increased rates from essential 0% to 5%, the bond market experienced a significant fall. In fact, the Bloomberg U.S. Aggregate (the common index that represents the broad bond market) experienced its largest drawdown not only in magnitude but also in duration since its inception and still has a long way to go for a full recovery. So why still consider bonds for a portfolio?

Bonds Role

Bonds tend to play one of two key roles in a portfolio – either providing income or helping to manage portfolio risk. Over the past several years, we’ve seen bond yields significantly increase, as shown in the chart.

Source: FactSet

This is good for long-term returns, as a bond’s return is based more on math than human emotions. To many investors, these yields provide an attractive alternative as they represent the future, and the yield on a bond tends to be indicative of a bond’s return during its term. Getting a 5% return on core bonds is an attractive option, and layering in any potential price movement from falls in interest rates is a bonus. A 1% fall in interest rates would be expected to lead to an 11% return for core bonds.

But what if the Federal Reserve increases rates instead? These higher yields also offset any potential negative impact from rate increases. An increase of 1% in interest rates would expect to see less than a 1% fall in total return. It was a significantly different experience than what we saw in 2022.

Bonds Volatility

The Move index is a measure of short-term bond volatility–its bonds equivalent of VIX. In the past three years, the index has consistently been above its prior all-time high seen in 2020 (COVID-19 pandemic), running at 2.5 times its long-term average. Despite running at higher levels of volatility, though, why are we still seeing money flow into bonds? The reason for this is that in addition to the higher yield, bonds still offer a lower volatility option relative to other asset classes, as shown below.

Source: Zephyr Style Advisor

Investors may be excited about the higher returns seen from some other defensive asset classes or strategies, like dividend yields, REITs, and buy-write options. However, they have much higher volatility than bonds and may not be the best place to hide when the equity market sees a large loss.

On top of continuing to provide a lower level of volatility, we’ve also seen bonds correlation to equities move back to a more normal relationship. This should allow bonds to zig more when equities zag and help to manage total portfolio risk.

Bonds as Ballast
Bonds are a critical component of a diversified portfolio, providing ballast when times get rocky. A higher yield today allows them to provide greater stability and help to reduce overall portfolio volatility.

But the key to remember is to diversify that bond exposure as not all bonds are created equal and spreading out the bets will help limit the exposure to not only the equity bear but also the bond bear. 

The Monthly Riddle

I am weightless, but you can see me. Put me in a bucket, and I’ll make it lighter. What am I?

LAST MONTH’S RIDDLE: What has three feet but no arms or legs?

ANSWER: A yardstick.

Tip of The Month

As we enter the second half of the year, review and rebalance your investment portfolio to align with your long-term goals and current market conditions. This proactive step can help optimize your investments for the remainder of the year.

Important Information
This is for informational purposes only, is not a solicitation, and should not be considered investment, legal or tax advice. The information has been drawn from sources believed to be reliable, but its accuracy is not guaranteed, and is subject to change. Investors seeking more information should contact their financial advisor. Financial advisors may seek more information by contacting AssetMark at 800-664-5345.

Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss. Actual client results will vary based on investment selection, timing, market conditions, and tax situation.

It is not possible to invest directly in an index. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Index performance assumes the reinvestment of dividends.

Investments in equities, bonds, options, and other securities, whether held individually or through mutual funds and exchange traded funds, can decline significantly in response to adverse market conditions, company-specific events, changes in exchange rates, and domestic, international, economic, and political developments.

Bloomberg® and the referenced Bloomberg Index are service marks of Bloomberg Finance L.P. and its affiliates, (collectively, “Bloomberg”) and are used under license. Bloomberg does not approve or endorse this material, nor guarantees the accuracy or completeness of any information herein. Bloomberg and AssetMark, Inc. are separate and unaffiliated companies.

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