top of page
Search
  • Writer's pictureNicholas Pihl

Yields Gone Wild

Yields on a 10 year Treasury Bond have risen rapidly over the last 22 months, and currently sit near 4.75%, compared with 1.8% at the beginning of 2022.


As a result, bond prices have gotten absolutely crushed over that time period. As you can see, prices for a 10 year bond topped out around $140, and now sit at $107.28 (for a total return of approximately minus 18%, including interest).

Most investors think of bonds as the safe alternative to stocks, and associate bond yields with "risk free return." However, over the last 4 years, they've been more like "return free risk." Seriously, look at that graph again. Brutal.


As outrageous as these bond losses have been, there are actually a few opportunities going forward. The yield to maturity on a 10 year bond currently sits at 4.736%. That's actually a viable yield from a retirement planning standpoint, for two reasons.


First, the higher the yield on bonds goes, the lower your risk of losing money in the asset over time. This means that bonds are more likely to fulfill their "capital preservation" role going forward. The financial math behind bond prices suggests that bond prices are less sensitive to changes in interest rates when they offer a higher yield to maturity.


Secondly, a 4.736% return is a lot better than a 1% return when it comes to replacing principal distributed from a portfolio. That matters for retirees because it increases the sustainable withdrawal rate of the portfolio. When bond yields sit at just 1%, a 50/50 portfolio of stocks and bonds will have a long term expected rate of return of just 5.5%. That 5.5% represents the upper limit of what can be distributed without depleting the portfolio. More realistically, a retiree in that scenario could only take about 3% out annually because you have to leave some money in the portfolio to keep up with inflation. However with bonds at their current yields, that upper limit increases to 7.368%, and roughly a 4-5% sustainable withdrawal rate (allowing for increases to match inflation).


Of course, when making investment decisions, you have to balance a variety of risks, which will be different for each person. This article isn't meant as blanket or personalized investment advice. It is merely my musings on the state and potential opportunities of the market today.


One interesting thing I'm seeing now is that recessions are less of a risk than they have been for retirees with a balanced portfolio. Most retirees (and everyone else) fear recessions because stocks typically fare poorly during such periods.

However, a retiree isn't (or shouldn't be) invested solely in stocks. A reasonable portfolio might look like a 50/50 blend of stocks and bonds. And in contrast to stocks, bonds typically do pretty well during economic contractions. Whether or not we enter a recession in the near future, treasuries might offer a decent rate of return going forward. So it's beginning to look like a case of "heads I win, tails I don't lose much."

So you could (no guarantees) earn a decent return on several years worth of "safe money," while giving the "stocks" part of your portfolio a lot of runway to grow without too much fear of eating into that principal.*


*Not investment advice. Implement ideas from this blog solely at your own risk, always do your own research, and I really encourage you to consult a financial professional before making big decisions with the assets you've spent a lifetime accumulating.

Recent Posts

See All

Not-so-Dumb-Guy Stock Market Math

The concept I'm sharing here is technically wrong, but I think it actually yields a better way to think about saving and investing in the stock market. The basic problem most of us have with investing

A Good, Easy Decision for RSUs

One of the biggest mistakes I see among people who have RSUs (Restricted Stock Units) as part of their compensation packages is that they keep holding the stock after it vests. RSUs are treated as tax

What does good health look like to you?

I heard this question recently at a Tony Robbins seminar, and found it intriguing. Partly because I hadn't thought about it very much, and partly because it's clearly a very important question. If you

Comments


bottom of page