U.S Bonds Rally on $900 Billion Relief Package Signing Amid Tepid Outlook

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Treasury bonds are once again showing signs of finishing the year on a high after a roller-coaster 2020. After initially plunging to record lows in the first quarter of the year, they have bounced back at the back of a wave of stimulus packages by policymakers.

Bonds Rally

The 10-year treasury yield was up by 2-basis points after the U.S president averted a looming government shutdown with the signing of a $900 billion COVID-19 relief bill. The 30-year Treasury bond also jumped 4-basis points to 1.7%.

With the signing of the $900 billion packages and talk of another $2,000 direct payments to Americans, talk is rife that the ten-year yield could make a run for the elusive 1% level. Likewise, the 30-year could receive a lift to the 2% mark in early 2021.

However, the ever-growing risk of record-low interest rates continues to arouse concerns about whether long-term bonds will continue to rise. Investors are increasingly shunning the bonds as they no longer provide the much-needed protection and diversification as was the case in the previous years when the Federal Reserve was raising interest rates.

Need to Take Risk

Unlike in the previous years, investors are increasingly questioning the need to put 60% in stocks and 40% in bonds. The FED remaining numb on when it is likely to raise interest rates is the biggest tailwind standing in the way of bonds bouncing back and generating significant returns, as was the case in the previous years.

Similarly, Wall Street experts are advising investors to take apro-risk stance and adapt to the changing role of bonds in portfolios. In this case, investors are being advised to focus on high-yield bonds and equities.

As it stands, bond yields are likely to remain paltry in 2021, given the record low interest rate environment. Income-focused investors will have to switch their attention to higher yields available in alternative fixed income investments, often overlooked.

Amid the bottom-scrapping interest rates, the stock market is expected to remain resilient, given the reduced borrowing cost. Conversely, many market sectors are expected to continue edging higher, spurred by the FED’s cut last spring.

Bonds-Stocks 2021 Outlook

The record low interest environment also points to continued FED bond-buying programs at current levels. While government borrowing is expected to remain at record highs, most of it will end in central bank bond-buying programs. Currently, central banks hold nearly half of all sovereign bonds in Britain, the Eurozone, and Japan.

While stocks are likely to continue providing higher returns in 2021, investors looking to diversify their portfolios can focus on investments correlated with stock to reduce risks. Alternative forms of bonds and bond-like investments would be an ideal pick.

Taxable Municipal bond funds are starting to elicit demand as local governments and authorities continue to refinance them. The strong demand stems from the fact that such bonds boast of yields of as much as 5% to 6%, which translates to an after tax yield of 3.5%, compared to many tax-free yield muni bonds with a2% to 3% yield.

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