‘Facing’ the Portfolio Allocation Decision?
by James Paulsen, Chief Investment Officer, Wells Capital Management
Perhaps no other event has shaped the post-war investment environment
more than the two faces of the bond market. Shortly after WWII, U.S.
bond yields began a slow but steady advance spanning more than 30 years
and climaxing with a surge in bond yields in the late 1970s never before
seen in U.S. history. This was followed by an equally dogmatic secular
decline in bond yields, also lasting more than three decades, which last
year saw the 10-year Treasury bond yield decline to a post-war record
below 1.5 percent! Investors are already pondering the future face the
bond market. With a current 10-year Treasury yield of only about 2
percent, they can no longer depend, as they have for decades, on a
persistent decline in bond yields. Who knows what the new face of the
bond market will be? Yields could remain rangebound at very low levels.
Perhaps they will bounce higher and then trend sideways. Or, maybe bond
yields will begin another secular climb.
What is clear, however, is the long-standing character of the bond
market is about to undergo change and its relationship to stock
investments will also likely be altered. For this reason, it is
worthwhile examining the interrelationship between stocks and bonds and
just how much this relationship has depended on the two post-war faces
of the bond market. (more)
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