If the ten-year Treasury climbed to 7% or 8%, would you move most of your portfolio into long-term bonds and stop worrying about the stock market? It is a fair question, and it came up during one of our recent Scholar Big Picture sessions in front of a live studio audience. I am hearing versions of it from clients more often, which tells me we are closer to that conversation than most people realize.
My short answer is no, I would not flip to an all-bond portfolio. But the reasons why are more useful than the answer itself, because they say a lot about how bonds should fit into your plan right now.
A High Yield Is a Signal, Not a Gift
The first thing I would ask if long-term rates jumped from around 5% to 7% or 8% is simple: why? Yields do not rise that quickly for no reason. A higher return is compensation for added risk, and that risk has to be coming from somewhere.
Maybe it is inflation that is running hotter than anyone expected. Maybe it is the sheer volume of borrowing the government and the private sector need to finance. Maybe it is growing doubt about whether the debt gets repaid on the terms everyone assumed. Whatever the cause, an 8% coupon on a 20-year bond is not free money. It is the market telling you something has gotten more uncertain.
If the driver is inflation, locking everything into fixed payments is exactly the wrong move. You would still want a meaningful slice of stocks to protect your purchasing power over time.
The Shock Absorber Is Less Predictable Than It Used to Be
Most of the portfolios we build look something like 60/40, 70/30, or 80/20. The bond portion has traditionally been the shock absorber. When stocks fall, bonds hold steady or rise, and the ride feels smoother.
The problem is that stocks and bonds do not always move in opposite directions. Over the last several decades there have been long stretches where they moved together, and it is hard to know in real time which regime we are in. Bonds still reduce risk. I just would not assume they will cushion every equity drop the way the textbook says.
That uncertainty is one more reason not to bet the whole portfolio on one asset class, even one that feels safe.
Coupons Are Doing More of the Work Now
Here is the good news. Even when a bond fund shows red on the statement, down 3% or 4% on price, the yield you are earning today is meaningfully higher than it was a few years ago. Over time, the coupons can outpace those price losses. You will not love seeing the red, but you are being paid to sit through it.
Higher starting yields also reduce interest rate risk going forward, because there is more income to offset future price moves. I think we may be heading into a period where bonds start to look genuinely attractive again, which is a big shift for anyone who invested through the zero-rate years.
It also explains why older rules of thumb like “hold your age in bonds” made sense in the 1980s and 1990s. When bonds paid real income, a 60-year-old holding 60% in bonds was reasonable. In a near-zero environment, it was not.
If You Want Certainty, Match the Cash Flows
For clients who want predictability, there is a better tool than flipping the whole allocation. If you can tell us what cash flows you need and when, we can build a bond ladder designed to produce them. Using Treasury STRIPS (zero-coupon Treasuries) removes reinvestment risk, because each bond pays out a known amount at a known date.
The trade-off is maturity. I feel a lot more confident about what a five- or ten-year Treasury will deliver than a 15- or 20-year one. The further out you go, the more you are assuming about the world staying stable. So I would use a ladder to cover specific, near-to-medium-term spending needs, and leave long-term growth to a diversified portfolio.
Seven Percent Is a Great Outcome
Part of what makes this conversation hard is anchoring. If you started investing in the last decade, you may think 12% or 13% a year is normal for large-cap stocks. It is not. After a decade of strong returns, I would expect the next ten years to come in lower, not higher.
If someone offered me 7% guaranteed for the next 20 years, I would take it without hesitating. That is a great outcome, not a disappointing one. Resetting your expectations to something realistic makes it much easier to judge whether a bond yield is attractive, and much harder to talk yourself into an all-or-nothing move when rates spike. If you are weighing how much of your portfolio belongs in bonds right now, that is exactly the kind of conversation to have with us, your advisors.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on how rising Treasury yields change the role of bonds in your portfolio, watch the full podcast episode here.