Throughout your life, investment gurus must have dropped down one unchanging lesson: diversify. You must have been told that it is foolish to invest only in stocks, and you must park part of your capital safely by investing in bonds, or gold, or both. It was always a provided fact that a share of your investment capital be allocated to bonds.
Previously there were valid reasons for this.
1. When you are young, you have a long time horizon to bear the brunt of a volatile stock market,
and you always expect to turn a net profit at the end of a decade or two. However, as you age, stocks start appearing as a low-risk investment zone, thus increasing your interest in investing more in stock.
2. Stocks also promised a regular form of income far greater than stocks and could act as a team of revenue after retirement
Currently, though, facts have changed. Treasury bonds have dropped their yields to 1%. A few months ago, it also touched the return value of 0.5%, which means a negligible return on investment. In such a case, your real value of the investment must be rapidly diminishing since the inflation rate far outruns the meager returns on treasury bonds. In short, the interest rate on treasury bonds, once adjusted for inflation, can only promise negative yields.
Why are the interest rates low for treasury bonds?
The bond market seems to be suffering a heavy blow due to the all-time high debt to America’s GDP ratio. This situation is not only contained within Erica but has taken the entire world in its clash. It’s not only the treasury bonds that have lost their attractiveness, but the corporate bonds and municipal bonds have exhibited the same trend.
Since the debt to GDP ratio is very high, promising a high return on bonds would mean an even bigger debt and spur a cyclical chain of events where the markets may crash due to scarcity of funds. Already in 2020, the Federal Government printed $10 trillion worth of notes to avoid becoming trapped and pay off the excessive debt it is carrying.
Should you still hold bonds?
This brings a dilemma of whether or not you should still hold bonds. The answer to it can vary according to what you want your money to do for you. If you are just holding onto bonds to lock in your savings and have some diversification in your investment portfolio, the bonds can still aid you. However, if your aim is earning even a decent return on your investment, you should explore alternative options of investment because the bonds can only deliver you negative returns and nothing more.
