After a dramatic and emotional year for financial markets in 2020, stocks and bonds have taken divergent paths to begin 2021. Stocks have continued to climb higher, while the price of bonds has declined. This is a result of higher economic growth expectations, which leads to higher bond yields.
Here is a chart of the yield on a 10-year US government bond over the past year:
Government bond yields crashed during the first quarter of 2020, as markets realized the economic implications of the COVID-19 pandemic. Yields bottomed in August 2020, but they have accelerated higher this quarter. At the end of the year, the 10-year treasury yielded 0.92%. As of March 31st, it yielded 1.75% – basically back to pre-COVID levels.
This increase in yields affects bonds differently depending on when they mature. Blackrock has exchange-traded funds (ETFs) that span the spectrum of maturity dates. As you can see from the following table, shorter-term bonds are much less affected than longer-term bonds:
As advisors, it’s our job to build portfolios comprised of different investments that all work together to optimize risk and returns for clients. Markets are dynamic and ever-changing. In a diversified portfolio, there will always be a best performer and a worst performer. Managing individual funds well through different markets takes thoughtful reflection and an open mindedness about what the next market environment might look like. In the current environment, treasury bonds have obviously struggled, but during the first quarter of 2020, TLT (iShares 20+ Year Treasury ETF) was up over 22% while stocks significantly declined.
There are also economic implications here: markets are recognizing that the economy is continuing to heal. More people are vaccinated, reducing the risk associated with COVID-19 and allowing many of the hardest-hit areas of the economy, like restaurants and travel, to rebound. The weather is turning from winter to spring, and it’s looking like our year-long economic winter is ending too.
