On the day I joined the financial services industry in 1983, 10-year U.S. Treasury notes yielded just over 11%. During my career they peaked at 14%. (The actual high point of 15 .75% occurred in 1981.) But despite some sharp reversals along the way, yields continued to decline until they reached a historic low-just above 2%-at the end of 2008. With the Federal Reserve's asset purchase program now holding Treasuries at their average level since the 2008 crisis point-and the U.S. economy on a sustainable growth path-the almost 30-year rally in Treasuries appears to be over. Now, investors reasonably ask whether fixed income investments actually have a future. My answer is that they do. But to participate, investors will increasingly need to globalize their thinking and consider opportunities beyond the supposed "risk free" haven of U.S. sovereign debt.
Investors have accepted the very low yields U.S. Treasuries offer because they have become global investors' financial fire insurance policy. However, a thoughtfully sized allocation to high quality bonds can help temper portfolio performance at times of market stress. The problem is that an overly large allocation can also temper appreciation when markets turn up, especially since a strengthening economy and improving returns from riskier assets will tend to push Treasury yields up and prices down.
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