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The Role of Treasury Bonds in a Diversified Portfolio

If there is a Rodney Dangerfield of investments, it has to be Treasury Bonds.  They always yield less than other taxable fixed-income investments with the same maturity, they don't get the airtime afforded stocks, and they don't have the mysterious allure of alternative investments.  But in times of crisis, when other investments are withering under the pressure, Treasury Bonds usually step into the breach to provide a diversified portfolio with capital gains when they're needed most.

As a very recent reminder of this, on Friday and Monday combined, the S&P 500 Index fell 6 1/4 percent and the Dow shed more than 1800 points.  Meanwhile, during those two days the 7-10 Treasury Bond iShare, to use a representative ETF, returned almost half a percent.  And this despite stronger-than-expected unemployment data on Friday morning.  While the positive returns generated by Treasuries during this period of extreme stress in the equity market weren't sufficient to prevent damage to most diversified portfolios, they certainly softened the blow. 

And this relationship recurs time after time in periods of crisis and uncertainty.  In living memory, during the crash of '87, the first Iraqi war, the Long Term Capital crisis, the bursting of the tech bubble, the 9/11 attack, and the bursting of the real estate bubble, investors drove Treasury Bond prices higher in a flight to quality.  This is another prime reason to periodically check the balance of your portfolio between stocks and bonds, especially after a multi-year run in stocks. Think of it like increasing your insurance coverage as your home's value escalates.  But then that's another story.