Gloomy 7 year outlook predicted for bonds
Jonathan Mackay of Morgan Stanley Wealth Management sees annual returns in the 1-2% range for investment grade bonds for the next 7 years, which correlates into a negative real return forecast when taking into account inflation. He goes on to suggest/recommend that investors hold a smaller allocation to bonds than in previous cycles. Also yesterday, Bank of America’s Michael Hartnett reported that 45% of all government bonds worldwide now yield less then 1%.
Many retirement plan participants have bought into the idea that bonds are save and that the closer they get to retirement, the more money they should have allocated to bonds. Unfortunately, if interest rates rise, the value of those bond portfolios fall. Thus, as people get closer to their retirement, their portfolios may actually be getting more risky.
Sooner or later plan sponsors and participants holding bond-heavy balanced and target date strategies in their retirement plans will be forced to examine what other investment alternatives are out there that may better position themselves for a rising interest rate environment.
