There’s a torrent of good Covid vaccine news over the last two weeks. Pfizer and Moderna’s candidates exceeded expectations in terms of efficacy. And a third, from AstraZeneca, is showing promising early results. Many bond investors are hoping that eradicating the coronavirus brings back normal economic times and boosts interest rates to a level where passive, broad-based exposure to core bonds would provide returns in excess of inflation.
That rosy outlook for rates isn’t happening so far, even though records are being set in the stock market. The U.S. yield curve flattened by 5 basis points, and the 30-year Treasury yield is down 3 basis points since the good vaccine news arrived. That seems counterintuitive, until you consider the biggest influence on bond yields – Federal Reserve policy. Fed Chairman Jay Powell and his team are committed to keeping interest rates low even after the economy recovers from the pandemic. Bottom line, a back-to-normal economy is highly unlikely to improve the prospective returns on bonds.
Faced with those challenges, investors using a goals-based framework should consider seeking alternatives to traditional fixed-income holdings. Depending on an investor’s risk tolerance, that could include holding more equities, alternative fixed-income market segments, or defensive equity strategies. Retirees should consider increased equity exposure to meet spending goals. Vaccines have changed the game for lots of things — the economy, public health, and our social and family lives. But for interest rates? Not so much.
To download a copy of this commentary, click the button below.