The golden age for buying and holding bonds may be coming to an end. And that could come as a shock to investors who are entering retirement. They may very well be counting on bonds to repeat their strong, recent returns while at the same time diversifying the rest of their portfolio, as they have during a three-decade bull market.

Horizon Investments’ calculations show just how bleak the next few years might be. The estimated annualized five-year return for the broadest bond market measure, the Bloomberg Barclays U.S. Aggregate Bond Index, is 0.0%, based on expectations for future interest rates and the current duration of the index. The main problem is that if interest rates rise, the current yield could be too paltry to make up for the drop in bond prices.

Rising rates are not the only problem. The other retirement dilemma is that today’s historically low interest rates could last for years, caught in the Federal Reserve’s vice-like grip. The central bank is promising to avoid negative interest rates (which would keep the bond bull market going), and it’s also pledging not to raise rates for years. Together, they point to a fixed income market that could be entering an ice age of little to no movement.

As a goals based asset manager, Horizon focuses on reducing longevity risk for retirees in the distribution phase. Our research leads us to believe alternative income ideas, including equities, are an important consideration as part of a holistic strategy to make sure retirees don’t outlive their money.

Further reading:
Bond Market Bears Growling as 10-Yr Yield Tops 1%
It’s Getting Harder to Fund Retirement Using Bonds
7.9 Trillion Reasons Not to Fight the Fed, ECB, BOJ or BOE
In Current Markets, Only Two Words Matter: Stimulus Spending
Top 2021 Themes: Horizon Investments’ New Year Special Report

This commentary is written by Horizon Investments’ asset management team. For additional commentary and media interviews, please reach out to Chief Investment Officer Scott Ladner at 704-919-3602 or sladner@horizoninvestments.com.

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