Key Points

  • Investors should still consider holding bonds, even though yields are still near all-time lows.
  • High-quality bond investments can still provide diversification benefits, and there’s a cost to waiting for rates to rise.
  • Bond ladders can help investors stay invested in the bond market regardless of the interest rate environment.

Bond investors face a challenging environment. The federal funds rate is back near zero, the 10-year Treasury yield remains stuck in a 0.5%-to-0.75% range, and inflation-adjusted (real) yields are deep in negative territory. Meanwhile, yields on riskier fixed income investments, such as high-yield bonds, have fallen as unprecedented fiscal and monetary policies have helped to prop up the economy and the financial markets.

Despite those challenges, we believe fixed income investments still have a place in a well-diversified portfolio. It may seem tempting to keep your money in cash, to take on more risk in the stock market, or to look to lower-credit-quality investments to potentially earn higher returns, but we continue to believe that high-quality, intermediate-term bonds should serve as the core of your fixed income holdings. Then, depending on your risk tolerance, higher-yielding investments can be added as a complement to those core holdings, but only in moderation.

Despite the challenges, we believe investors should consider the following reasons to hold bonds today:

  • They offer potential diversification benefits.
  • Short-term rates are likely to stay lower for longer.
  • Yields aren’t near zero across the board, but higher-yielding bonds come with higher risks.

On top of these benefits, we believe bond ladders are one way to stay invested during these challenging times, as we discuss below.