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Bonds have had a terrible decade, but investors can expect better times ahead, according to Ben Carlson, director of institutional management at Ritholtz Wealth Management. A recent analysis by Deutsche Bank found that on a five- and 10-year basis, this has been the worst period for 10-year Treasury nominal returns. The same goes for the 30-year Treasury , which saw even more extreme downside, the firm said in a recent note. Carlson took it a step further, looking at returns by decade for various maturities. He found the 2020s are on pace for the worst decade in modern times. Yet, taking inflation into account, it is even worse, he said. That is reflected in bonds’ real returns. “Inflation is really the biggest risk for bonds,” Carlson told CNBC. “Inflation is the thing that hurts because it eats into the interest income you’re getting paid back.” Long-term Treasurys have been the most negatively impacted. Those that have maturities of 20 years or more, as evidenced by the iShares 20-Year+ Treasury Bond ETF , have seen a total return of more than -40% since 2022, he said. TLT 5Y mountain iShares 20+ Year Treasury Bond ETF’s five-year returns A better place now However, the outlook moving forward is improved now that starting yields are higher, he said. Bond yields move inversely to prices. There is a 0.95% correlation between starting yield and the forward five- or ten-year returns for bonds — therefore, a higher starting yield means a higher expected return, he explained. He’s just not calling them a “screaming buy.” “It’s been painful to get here,” Carlson said. “[Yet], bond investors are in a much better place than they have been for probably the last 15 years or so, just because yields are higher.” While there is still concern that rising rates and inflation can hurt bonds, there is also a bigger margin of safety now thanks to those yields, he said. Investors can also be protected if there is a recession or if economic growth slows, he added. “If rates fall, then you kind of get a double whammy of price appreciation and income,” he said. Being more thoughtful Both short- and intermediate-term bonds can have a place in portfolios right now, as long as investors understand their roles, Carlson said. Short-term bonds, like Treasury bills and money market funds , saw an influx of investors during the bond market rout. However, the assets will see yields fall swiftly if the Federal Reserve lowers rates in response to an economic slowdown or lower inflation, he said. BIL 5Y mountain SPDR Bloomberg 1-3 Month T-Bill ETF’s 5-year returns “When those rates fall, you’re not going to get any price appreciation because the time frame is so much shorter,” he said. “You have to think about those types of vehicles not as much for yield anymore, even though the yields are pretty respectable. It’s more about, do you want protection from volatility? Do you want protection from interest-rate risk?” Meanwhile, intermediate-to-longer-term bonds can make sense for those who want to hold them and take advantage of the yield, Carlson noted. SHY IEF 5Y mountain Comparison of iShares 1-3 Year Treasury Bond ETF five-year returns to iShares 7-10 Year Treasury Bond ETF (IEF) five-year returns “If you wanted to lock in longer-term yields because you have something you want to pay for in five or 10 years, then I think that makes sense. If you’re trying to guess which way rates are going to go, that’s much harder to do” he said. The bottom line is that investors have to be more thoughtful about their fixed-income portfolios now, he said. “Investors just have to be a little more cognizant of what they have, and they know that these different bonds serve different purposes,” Carlson said. “Maybe some more diversification is the answer, and owning different types of bonds for different environments.”
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