By Paul Vigna
Stocks have staged a furious rally since bottoming in late
March, but bonds are still winning the race for returns this
Despite a 47% rise since March 23, the S&P 500 is up just
2.1% in 2020. The Dow Jones Industrial Average is down 4.8% and the
Russell 2000 index of small-capitalization stocks is off 12%. Only
the Nasdaq Composite has managed a meaningful increase this year,
up 22%, because of a surge in a handful of big technology
Government-bond yields, meanwhile, have dropped to historic lows
as prices have risen and investors have scrambled for havens in the
midst of the coronavirus pandemic. The Fidelity U.S. Bond Index
Fund is up 7.1% this year, while the iShares U.S. Treasury Bond ETF
has risen 9%.
The problem for bond investors? The gains, much like those of
equities, have been driven by Federal Reserve monetary policy,
which has steadily driven yields down since the financial crisis of
2008. The question is whether, with rates so low, investors can
still count on the combination of safety and performance that bonds
are known for offering.
"It's more normal than many people assume" for bonds to
outperform stocks, said Scott Mather, who manages Pimco's $70
billion Total Return Fund, which is up 7.8% year to date. "People
don't understand you can do pretty well in bonds."
Over the past two decades, the average annual return on the
S&P 500 is 4.25%, according to Dow Jones Market Data. With
dividends, that return rises to 6.32%, just outpacing the Total
Return Fund's annual average of 6.07% since the start of 2000.
Meanwhile, investors who bought a 30-year U.S. Treasury bond in
September 2000 received a 5.70% interest rate -- and will be
enjoying that yield for another decade, too.
Yields, though, are now flirting with record lows, hovering
below 1.5% for the 30-year and around 0.66% for the 10-year. For
many investors, that is an argument for the "TINA" trade, a bet
there is no alternative to stocks when the yield on the S&P 500
sits at 1.71%.
Who is still buying government debt at those levels? The Federal
Reserve last week released its flow of funds report for the second
quarter, which breaks it down.
The largest domestic holder of U.S. government debt was the
Federal Reserve itself, which had about $4.8 trillion of Treasury
bonds as of June 30. That was followed by retirement plans run by
the federal government, which held about $4 trillion.
Households and nonprofit organizations held about $1.7
Among other big holders were money-market funds with $2.3
trillion, mutual funds with $1.2 trillion, U.S. banks with about
$930 billion, private pension plans with about $700 billion and
state-run retirement plans with $337 billion.
Despite falling yields, the core thesis for buying bonds hasn't
changed, Mr. Mather said. Investors turn to bonds for steady income
and capital preservation, as a hedge against volatility in the
stock market and to keep pace with inflation.
With the Fed dedicated to driving inflation higher and keeping
rates lower, bond investors seeking a higher return should think
more like stock investors, said Adam Koos, president of Libertas
Wealth Management Group.
For clients interested in bonds, he buys mutual funds or
exchange-traded funds. As opposed to owning bonds directly, funds
can and do lose value. He also recommends other techniques
including hedging against declines and even shorting the bond
market at times.
"Savers, especially older folks, are going to find out the hard
way, bonds aren't so safe anymore," said Mr. Koos, whose investment
firm in Columbus, Ohio, has about $68 million in assets under
Still, Mr. Mather says the conditions are prime for the bond
market's run to continue, pointing to the possibility of lower
inflation or an extended economic downturn that forces the Fed to
unveil additional stimulus.
"It's not unrealistic for another year or so of good returns,"
Write to Paul Vigna at email@example.com
(END) Dow Jones Newswires
September 27, 2020 10:14 ET (14:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.