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Going all-in on bonds ?

Oct 11, 2023

With the 10 year US and German government bond yields at a juicy 4.6% and 2.8% respectively, investors are increasing the allocation to bonds. This makes sense as the interest-rate hikes by central banks may be close to done and peak rates reached. 2 caveats: First, as the y-t-d negative performance of bonds has again proven, timing peak interest rates is difficult. Secondly, the odds of outperforming equities with bonds have in the past 150 years been disappointingly low. In the below study from Macrobond based on the S&P 500 and 10-year US government debt with data back to 1871, bonds and stocks are examined on a total return basis, i.e. including interest, dividends and distributions as well as capital gains. Even on a one-year basis, there was only 38% probability that bonds outperformed stocks. On a 25 years time horizon, the odds were close to zero. Why should it be different this time ?

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