"Why Own Bonds?"

Wells Fargo put out a report titled Why Own Bonds? From the title, I guessed it was going to confirm my biases about bonds (with duration) and talk about avoiding bonds (with duration). No sir. I took the report as actually being pro-bonds (with duration, I'll stop including that from here but that is what I mean going forward, with duration).

Some of the points made in supporting their argument are worth exploring. 

In fact, in a relatively elevated interest rate environment, a well diversified bond portfolio may provide positive returns. 

Great news! Returns might actually be positive! There's obviously some CYA in that one but it's not exactly a ringing endorsement for bonds. 

We think over the next several years fixed income investors should anticipate a return that is near or slightly below the longer term historical average fixed income return.

Um ok, I mean who wouldn't want that? 

From March 9, 2009 through December 31, 2019 equities were up more than 498% and bonds returned 54% while cash alternatives realized little return.

Earlier in the piece they talked about rates having gone up and later they touch on the yield curve so yes, of course cash alternatives had very low returns. 

Do you want to increase your concentration in an asset class that historically exhibits great volatility in the search for return.

That was the last one. Their analysis is obviously very binary, there can only be bonds in their world to diversify equities. A quick comparison;

I didn't even use something very long dated as the example for what not to use. AGG's duration isn't that long. The struggles for AGG have been prolonged of course but it is also important to mention that MERIX, SRLN and ARBIX all got hit hard in the 2020 Pandemic Crash so they are not infallible but the snap back was quick and the hit was no where close to that of equities. I excluded it for being a shock caused from outside the world of capital markets and economics. MERIX is a client and personal holding.

My long time thesis of course has been that bonds no longer function as reliable diversifiers, they've instead become a source of unreliable volatility. Looking back at long data sets doesn't make sense if the diversification characteristics have indeed changed. We now understand how volatile bonds can be. Wells Fargo is apparently ok with that volatility but the question is, are you ok with it? We explore plenty of ways to get the effect that people hope to get from bonds without the volatility that now goes with owning bonds.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.