The Shifting Role of Bonds
Despite historic low yields, bonds may offer valuable diversification over the next five years.
In its simplest form, asset allocation might be viewed as the choice between stocks, bonds and cash, with stocks enabling growth and cash providing safety.
The role of bonds, however, is less clear. Our research on the stock-bond correlation projects that bonds will be a valuable diversifier over the next five years. Still, investors may worry that bonds are overpriced in light of their current low yields. We show that current bond prices are reasonable if stocks become volatile and bonds offer strong diversification. Moreover, we argue that current yields have precedent and do not preclude bonds from offering helpful diversification in the future.