Bond Yields Hit All-Time Lows

Published March 2, 2020
The drop in US and global stock markets in response to the coronavirus has made it one of the worst weeks in stock market history. It’s best practice to make sure your portfolio is prepared to handle a wide variety of market stresses, and buying guaranteed retirement income or a guaranteed return annuity is strongly worth considering across all market scenarios.

­­­­­­­­­­­­­­­­­­­­­­Everyone’s talking about what the stock market did last week in response to the spreading coronavirus. And for good reason. It was one of the worst weeks in stock market history. The 3 most widely followed US indices were down 10-13%: 10.5% (NASDAQ), 11.5% (S&P 500), and 12.4% (DJIA).

But when it comes to your decision about whether and when to buy a fixed or income annuity, it’s really bond yields that matter. And the impact of last week’s events was severe. We watch the 10 year Treasury yield most closely as a litmus test for upcoming changes in annuity rates. The news was not good.

The 10 year Treasury yield started the week at 1.47% and ended it at 1.13%. This is down from 3.23% a year and a half ago. The 10 year Treasury is at an all-time low.

The logical fallacy (and it’s one we hear a lot) would be to assume that since yields are at all-time lows, they are poised for a rebound. Here’s the thing — financial markets don’t follow the law of physics that say what goes up must come down (and what goes down must come up).

There are plenty of examples of financial assets going up and staying up over a medium or long-term time horizon. Take, for example, stock in Amazon, Apple, Google or Microsoft since their IPOs. Or the inflation rate in Venezuela over the last 40 years.

There are also plenty of examples of financial assets going down and staying down over just as long a period. How about the Japanese stock market, which is still not back to 1980s levels? Or equity in the thousands of once-public companies that have gone bankrupt in the last century?

Or how about someone who said in 2010 that they were waiting for higher rates to purchase an annuity? That person would still be waiting for those higher rates.

Before it happened, it was difficult to predict that the last decade would result in a steady decline in interest rates. But we shouldn’t be kicking ourselves for not knowing what would happen in the bond market. We should only be kicking ourselves for thinking we did.

Why does all of this matter? Conventional wisdom is to not overweight recent events. Doing so subjects you to what behavioral economists call ‘recency bias.’

At the same time, don’t be fooled into thinking that bond yields will inherently get back to their long-term averages any time soon. They might, but there is a growing amount of evidence (and smart people) pointing in the direction that they won’t. (See here for example).

What does all of this mean in practical terms? It’s best practice to make sure your portfolio is as well-prepared as possible to handle a wide variety of market stresses and shocks, especially in that critical period just prior to and just after you retire. A portfolio built like that will be more resilient to market turmoil, and you as an investor will be more likely to execute your plan rather than getting spooked by downturns like this. Diversification is a strong part of the reason why we believe buying guaranteed retirement income or a guaranteed return annuity[1] is worth strongly considering across all market scenarios. In fact, having a source of stability in your portfolio can help you stay the course during downturns and actually capture more market growth overall (rather than exiting out of fear during the lows and then buying back in when you’re confident at the highs[2]).

Have a question? Please give us a call or email us at [email protected]. We’d love to help!

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[1] Guarantees subject to claims paying ability of the insurer.

[2] Some industry experts have questioned DALBAR’s methodology.

Blueprint Income

Blueprint Income

Financial Planning Professional

We are a team of finance, insurance, and actuarial professionals working to make it easier for everyone to achieve a steady and comfortable retirement. We write about annuities (the good and the bad) and provide strategies to help Americans prepare for retirement.

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