Bonds may be in the least desirable asset allocation position of baby boomer generational investors. Advancing inflation compromises the ability of fixed income coupons to keep pace with rising prices. The erosion in purchasing power yields a negative arbitrage for holders of fixed income instruments who consume goods and services at escalating prices.
Over much of the past forty years, intervals of risk aversion in financial markets have traditionally been times when investors moor against the safe anchor of Treasuries. As a recent Bloomberg opinion article highlighted, “Bonds have been as close to a sure thing as there is in financial markets over the past four decades.” Having been employed in the investment profession since the early 80’s, my partners and I can attest to then Fed Chairman Volcker’s architectural design to combat inflation. Volcker had a tall order: my first home carried a mortgage rate percentage well into the mid-teens, and, in the late 70’s, the Iranian oil embargo caused long lines to purchase gasoline despite odd/even rationing based on license plate numbers.
To read more, download the full thought piece here.