Bonds are once again looking attractive as fixed-income investors seek diversification amid high interest rates. With yields rising to multi-year highs, bonds can serve as a balancing force for investors facing volatile equity market movements.
Paul Olmsted, Senior Manager Research Analyst at Morningstar Research Services, notes that the bond market’s concerns revolve around tariffs, inflation, and interest rates. However, he emphasizes the importance of having a diversified portfolio with bonds.
Olmsted considers three key moments this year: the Fed’s expected interest rate decision on July 30, the ongoing uncertainty surrounding Trump’s stance on the Fed Chair, and the lingering memory of the worst bond market ever in 2022. Despite these challenges, Olmsted believes that bonds can provide diversification benefits during stock selloffs.
When it comes to optimal fixed-income allocation, Olmsted suggests focusing on credit quality rather than short- or long-term holdings. He recommends bonds with a mix of short and long maturities to balance risk and return.
The best bonds for portfolio diversification are those that offer a mix of credit quality, yield, and liquidity. Olmsted lists three strategies to provide higher income potential: investing in high-yield bonds, using bond ladders, and leveraging tax-loss harvesting.
In conclusion, bonds can be an attractive addition to a diversified portfolio during high-interest rate environments. By considering credit quality, yield, and liquidity, investors can tap into the diversification benefits of bonds amidst market volatility.
Source: https://www.morningstar.com/bonds/why-bonds-belong-your-diversified-portfolio-even-now