Bonds aren’t the right fit for every portfolio. For younger investors or those who can handle more risk and volatility, we often recommend a more growth-focused approach without them. That said, bonds still play an important role in diversification, helping to balance risk and smooth out returns. And even after one of the toughest stretches in bond market history, there are still solid opportunities out there – you just have to know where to look.
Interest rates are fluctuating as investors adjust their expectations around economic growth, Federal Reserve rate moves, and the Trump administration’s policies. The 10-year Treasury yield had risen as high as 4.8% in recent weeks before settling below 4.6%. The 2-year Treasury yield is also elevated, now around 4.3%, and the 30-year mortgage rate remains above 7%.
Concerns around artificial intelligence stocks have also led to market swings, affecting interest rates as well. For example, the recent decline in Nvidia’s share price and questions around AI chips have impacted the broader stock and bond markets. While interest rates are just one of many factors that influence portfolios, understanding these dynamics can help provide context for long-term financial planning.
Interest rates are important because they affect the balance between stocks and bonds. When interest rates are higher, investors can earn more from relatively safe investments like government bonds. This also influences what’s known as the “equity risk premium” – the additional return that investors demand for taking on the risk of investing in stocks rather than lower-risk assets. As rates change, this premium adjusts accordingly, impacting how investors allocate their portfolios between stocks, bonds, and other assets.
Interest rates remain high, even after inflation
In periods when inflation is a concern, what matters to investors are “real yields,” or the return investors earn on bonds after accounting for inflation. Real yields are now around their highest level in over a decade. Yields on bonds jumped sharply after last November’s presidential election as investors anticipated pro-growth policies and lower taxes, even though higher tariffs and other factors could result in higher inflation.
Bond prices and yields have an inverse relationship – when yields rise, the prices on existing bonds fall, and vice versa. For those who are buying and selling bonds regularly, these price changes can impact portfolio returns.
Importantly, for long-term investors who are buying and holding bonds, including those in retirement, higher yields provide greater levels of portfolio income. This can help support retirement spending goals and potentially reduce the need to sell assets to cover everyday expenses. Additionally, higher yields may offer better opportunities for portfolio diversification, as bonds become more competitive with other asset classes. Of course, this depends on each retiree’s specific circumstances and should be discussed with your advisor.
The stock market earnings yield is less attractive
One way to measure the stock market’s “equity risk premium,” or how attractive stocks are compared to bonds, is via its earnings yield. This represents how much a company earns relative to its stock price, calculated by dividing earnings per share by the share price. It is useful because like bond yields, it measures how much an investor receives relative to its price.
The accompanying chart shows that the S&P 500 earnings yield has been on a declining trend for the past 15 years. Today, it is about the same as the 10-year Treasury yield, suggesting that the overall stock market is now less attractive than in the past. This situation reflects both the higher interest rate environment, as well as the strong bull market in stocks. Typically, investors demand a higher premium for holding stocks versus bonds since they are riskier.
A low equity risk premium does not forecast a market decline. There have been many periods when earnings yields have been quite low during bull markets, particularly during times of low interest rates. It simply means that the stock market has grown more expensive compared to other asset classes.
One reason broad market valuations are expensive today is because of the strong rally in technology stocks over the past several years. Other sectors are still more attractively valued, highlighting the importance of diversification. What matters is balance between asset classes, as well as maintaining appropriate risk levels based on individual investment objectives and time horizons.
Bonds are an important part of a diversified portfolio
With current interest rates, bonds are offering some of their most attractive yields in over a decade. This is especially important with short-term cash yields expected to decline further due to Fed rate cuts, affecting CDs, savings accounts, money market funds, etc. During periods of market uncertainty that cause interest rates to fall, bond prices tend to rise which helps to offset stock market swings.
Regardless of where interest rates go from here, fixed income is important for portfolio diversification in the right circumstances. Not only have bonds been historically less volatile than stocks, but they also tend to help balance swings in stock prices. In fact, bonds often move in the opposite direction of stocks, helping to keep portfolios on track when market conditions change. This reduces overall portfolio risk and helps to keep investors on track.
The bottom line? Higher interest rates have created more attractive fixed income opportunities, giving investors better portfolio income and diversification options. Investors should stay focused on the long run as they stick to their portfolio and financial plans.
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which may contain security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website or Blog constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
Bonds Can Present Opportunities in This Market
Bonds aren’t the right fit for every portfolio. For younger investors or those who can handle more risk and volatility, we often recommend a more growth-focused approach without them. That said, bonds still play an important role in diversification, helping to balance risk and smooth out returns. And even after one of the toughest stretches in bond market history, there are still solid opportunities out there – you just have to know where to look.
Interest rates are fluctuating as investors adjust their expectations around economic growth, Federal Reserve rate moves, and the Trump administration’s policies. The 10-year Treasury yield had risen as high as 4.8% in recent weeks before settling below 4.6%. The 2-year Treasury yield is also elevated, now around 4.3%, and the 30-year mortgage rate remains above 7%.
Concerns around artificial intelligence stocks have also led to market swings, affecting interest rates as well. For example, the recent decline in Nvidia’s share price and questions around AI chips have impacted the broader stock and bond markets. While interest rates are just one of many factors that influence portfolios, understanding these dynamics can help provide context for long-term financial planning.
Interest rates are important because they affect the balance between stocks and bonds. When interest rates are higher, investors can earn more from relatively safe investments like government bonds. This also influences what’s known as the “equity risk premium” – the additional return that investors demand for taking on the risk of investing in stocks rather than lower-risk assets. As rates change, this premium adjusts accordingly, impacting how investors allocate their portfolios between stocks, bonds, and other assets.
Interest rates remain high, even after inflation
In periods when inflation is a concern, what matters to investors are “real yields,” or the return investors earn on bonds after accounting for inflation. Real yields are now around their highest level in over a decade. Yields on bonds jumped sharply after last November’s presidential election as investors anticipated pro-growth policies and lower taxes, even though higher tariffs and other factors could result in higher inflation.
Bond prices and yields have an inverse relationship – when yields rise, the prices on existing bonds fall, and vice versa. For those who are buying and selling bonds regularly, these price changes can impact portfolio returns.
Importantly, for long-term investors who are buying and holding bonds, including those in retirement, higher yields provide greater levels of portfolio income. This can help support retirement spending goals and potentially reduce the need to sell assets to cover everyday expenses. Additionally, higher yields may offer better opportunities for portfolio diversification, as bonds become more competitive with other asset classes. Of course, this depends on each retiree’s specific circumstances and should be discussed with your advisor.
The stock market earnings yield is less attractive
One way to measure the stock market’s “equity risk premium,” or how attractive stocks are compared to bonds, is via its earnings yield. This represents how much a company earns relative to its stock price, calculated by dividing earnings per share by the share price. It is useful because like bond yields, it measures how much an investor receives relative to its price.
The accompanying chart shows that the S&P 500 earnings yield has been on a declining trend for the past 15 years. Today, it is about the same as the 10-year Treasury yield, suggesting that the overall stock market is now less attractive than in the past. This situation reflects both the higher interest rate environment, as well as the strong bull market in stocks. Typically, investors demand a higher premium for holding stocks versus bonds since they are riskier.
A low equity risk premium does not forecast a market decline. There have been many periods when earnings yields have been quite low during bull markets, particularly during times of low interest rates. It simply means that the stock market has grown more expensive compared to other asset classes.
One reason broad market valuations are expensive today is because of the strong rally in technology stocks over the past several years. Other sectors are still more attractively valued, highlighting the importance of diversification. What matters is balance between asset classes, as well as maintaining appropriate risk levels based on individual investment objectives and time horizons.
Bonds are an important part of a diversified portfolio
With current interest rates, bonds are offering some of their most attractive yields in over a decade. This is especially important with short-term cash yields expected to decline further due to Fed rate cuts, affecting CDs, savings accounts, money market funds, etc. During periods of market uncertainty that cause interest rates to fall, bond prices tend to rise which helps to offset stock market swings.
Regardless of where interest rates go from here, fixed income is important for portfolio diversification in the right circumstances. Not only have bonds been historically less volatile than stocks, but they also tend to help balance swings in stock prices. In fact, bonds often move in the opposite direction of stocks, helping to keep portfolios on track when market conditions change. This reduces overall portfolio risk and helps to keep investors on track.
The bottom line? Higher interest rates have created more attractive fixed income opportunities, giving investors better portfolio income and diversification options. Investors should stay focused on the long run as they stick to their portfolio and financial plans.
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which may contain security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website or Blog constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
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