Bonds have a long history of being vital sources of capital preservation and income in investment portfolios, particularly for retirees. But that reputation is fading.

Yields on high-quality corporate bonds and risk-free U.S. Treasuries have been marching lower for the better part of 40 years, to the point where they no longer provide the level of income that most retirees need from an investment portfolio:

U.S. Treasury and Corporate Bond Yields Have Been Falling Since the Early 1980s


Source: Federal Reserve Bank of St. Louis1

The risk-free rate (U.S. Treasury yield) now hovers around 1%, which means that bond investors today are likely to lose purchasing power over time given the effects of inflation. The outlook also remains fairly bleak: interest rates are actively being pushed lower by the Federal Reserve and central banks across the world, with bond buying and stimulus programs running at near full steam. The end result is that interest rates are not likely to move substantially higher for several years, in my view.

This environment may have many investors wondering whether it’s worth owning bonds anymore. I think the answer first depends on your tolerance for volatility, your income needs, and your long-term goals. I personally would argue that a majority of investors do not need significant fixed income in an investment portfolio with a long-term time horizon. But that does not mean bonds are dead, or that they can no longer play a vital role for some investment strategies.

For one, bonds can still be used to diversify a portfolio and reduce risk. Looking at the S&P 500 Index and the Bloomberg Barclays Aggregate U.S. Bond Index over the last ten years, there is basically zero correlation between the two.2 When bonds zig, stocks zag, and vice versa. For investors, that means when stocks in a portfolio experience price declines, bonds usually see price increases. The end result is less portfolio volatility – an outcome that’s important for many investors, even if it means slightly lower total returns over time. Second, even though most high-quality bonds are paying very little interest at the moment, they still offer very high probability of principal protection – which, again, is important to some investors. The so-called ‘sleep at night’ factor.

At the end of the day, the issue I see in the bond markets today is less about low interest rates and more about investors “reaching for yield.” There is a trend among retail investors of moving further out on the bond risk curve in order to obtain income, in many cases buying lower quality high-yield bonds and even emerging market debt (where yields are much higher). If that sounds like you, then maybe it is time to sanity check the role of bonds in your portfolio, and decide whether they’re worth owning at all. Chances are, you can produce similar levels of income with better risk profiles elsewhere, for example in dividend-paying value stocks.

Bottom Line for Investors

Bonds continue to serve many key functions in portfolio management. And for many older investors, bonds are – and will remain – a bedrock for your investment strategy.

But in the current market environment, no single bond investment is capable of producing the income and principal protection that many investors seek. Investors need to get creative, and I think one smart option is to build a customized portfolio of high-quality corporate bonds coupled with dividend-paying value stocks, to strike a balance between income, stability, and long-term growth.


1 Board of Governors of the Federal Reserve System (US), 10-Year Treasury Constant Maturity Rate [DGS10], retrieved from FRED, Federal Reserve Bank of St. Louis;, June 8, 2020.

2 BlackRock Blog, April 14, 2020.


Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.