Forecasts of interest rate movements often have been inaccurate. Instead of trying to predict the
direction of future interest rates, you should ask, “What is the purpose of bonds in my portfolio?”
The answer: among diversified holdings, bonds significantly reduce overall portfolio volatility and
provide a more consistent income stream.
How do bonds reduce volatility? When stocks go down, bonds may outperform riskier assets. During
market corrections, the S&P 500 Index has lost 5.7 percent, on average, while Treasury bonds have
returned 3.7 percent. When stocks fall, a flight to quality ensues, driving up bond prices, especially
Treasuries.
Thus, the positive returns of U.S. government bonds during severe market downturns offers effective
diversification benefits when it is needed most. The more you prize stability and income, the greater
your allocation to bonds should be.
