Investment Grade Bonds Heading for Third Year of Decline

For decades, the standard advice from investment professionals was to invest a portion of your portfolio in bonds – for safety and security. The general investment idea was that if the stock portion of your portfolio goes down, bonds will go up. In recent years that correlation has failed—leaving investors with big losses on both the stock and bond sides of their portfolio.

Looking back

In 2022, the S&P 500 fell 18.01%. That’s when bonds were supposed to shine. Instead, the bond market also posted double-digit losses. The Bloomberg U.S. Aggregate Bond Index represents the government and high-grade corporate bond market, and the $92 billion iShares Core U.S. Aggregate Bond ETF which represents that index plunged –13.06% in 2022.

Bonds are heading for a third year of declines

In fact, the billion iShares Core U.S. Aggregate Bond ETF, known by its ticker symbol AGG, fell by -1.67% in 2021, -13.06% in 2022 and is now heading for its third straight year of losses in 2023, with a -1.01% market return.

In hindsight, this was a good recommendation.

Looking back, this 2019 Gold Hub research report accurately warned investors of this coming shift:

“Central banks have shifted to a new regime of easy monetary policy, thus reducing expected bond returns. As negative yielding debt increases alongside stock-to-yield valuations to all-time highs, gold may become an attractive and more effective diversifier than bonds, justifying a higher portfolio allocation than historical performance suggests.”

It is evident that, following the pandemic, bonds have become a less reliable portfolio diversifier than in recent decades.

What’s an investor to do?

When seeking replacements, money managers pursue a strategy called “security dispersion” which allows investors to capture an alternative source of return. Security dispersion relates to the difference between winners and losers in the market.

When you are looking for an alternative investment, consider the three D’s of alternative diversifiers:

• Is diversifying to your portfolio,
• Is a durable source of return, and
• Is defensive when you need it

How do gold bullion and rare coins stack up?

Diversification: Gold is a proven stock portfolio diversifier because it negatively correlates to stocks — simply put: when stocks go down, gold goes up. Precious metals and rare coins also react to different market conditions than stocks and bonds, making them efficient asset classes to keep portfolios balanced through economic cycles.