Using Bonds for Smart Investment Diversification

🚩 Stagflation is No Longer Just a Theory ⁉️ In New York, stagflation is technically here, does portend its spread throughout the country or is it an outlier? Either way, it is time to at least talk about the reality and what we can do to protect our fixed income investment portfolios. Markets are slowly waking up to a simple but brutal reality: Sticky inflation + slowing growth = stagflation risk 🔥📉 Most investors are still leaning heavily on cash, nominal Treasuries, or credit for "defensive" positioning. But here's the problem: Nominal bonds protect you from recession. They don’t protect you from inflation during recession. ✅ This is the environment where TIPS (Treasury Inflation-Protected Securities) can provide a meaningful diversification solution: 🔸 CPI-adjusted principal gives direct inflation compensation 🔸 Government credit avoids spread widening risk 🔸 Liquidity (vs. commodities or hard assets) makes them accessible to both institutions & individuals 🔸 Particularly useful for front-end inflation shocks (energy, shelter, services inflation) 🔬 What are macro-scenarios where TIPS could outperform nominals? 1) Debt monetization risk 2) Headline inflation begins to surprise higher 3) Energy spike (geopolitical risk?) 4) Stagflation (low growth/persistent inflation) 5) Fed loses credibility (inflation expectations disconnect from Fed) 6) Supply chain breakdown (tariffs?) 7) Shelter CPI lag catchup (OER lag), 8) Reshoring, labor costs up 9) Dollar devaluation Obviously the opposite of the above scenarios would result in underperformance by TIPS, but they can be an excellent diversifying tool to ballast against up-surprises in CPI, concerns about US debt monetization and Fed policy errors. 💡 Bottom line: Stagflation hedging isn’t about predicting CPI perfectly — it’s simply protecting real purchasing power when nominal bond portfolios aren't keeping up. #Inflation #TIPS #Stagflation #Bonds #FixedIncome #Treasuries #RealYields #PortfolioManagement #MacroStrategy #InvestmentStrategy #MarketInsights #AssetAllocation #RiskManagement #InterestRates #CPI #FederalReserve

In the current environment, we see opportunity to enhance the #diversification characteristics in portfolios with international bonds. Why? 1. Potential for one-time deflationary shocks for tariffed countries should put more downward pressure on rates in regions outside of the U.S. and thus create potential upside price appreciation for non-U.S. bonds as these effects are realized. 2. We also see global central banks (like the European Central Bank, shown below) attempting to combat lower growth and acknowledge lower inflation by cutting interest rates more often and more aggressively than the Fed. This creates a near-term opportunity, in our view, to benefit tactically from non-U.S. government and investment grade bond exposure. 3. Importantly, we favor a USD-hedged approach to investing in non-U.S. bonds given the more attractive risk characteristics and additional carry the currency hedging brings. Read more in BlackRock’s Fixed Income Outlook: https://1blk.co/4lDoU5X

Unpopular Opinion: Every investor should own bonds in their portfolio. This even includes those with an aggressive risk tolerance. If you disagree with this, it is probably because you consider bonds to be a tool that exists to dampen risk (and return) in your portfolio. Instead, you should consider which type of bond may help you diversify the risk of your portfolio without sacrificing return. Take extended duration treasury bonds, for example. In isolation, they have historically been more volatile than stocks and are not for the faint of heart. They recently experienced a drawdown over 50% due to the sharply rising interest rates in 2021-2022. However, when combined with a portfolio of stocks, they can help lower the portfolio volatility without decreasing returns. They may even help the portfolio have higher returns with lower volatility. This increased efficiency of return is a result of diversification. So, when I say that every investor should own bonds, I’m really saying that every investor should try to tap into the power of diversification. Just beware that there is no guarantee that diversification will lead to better outcomes. You need to be fully convinced of the logic behind the use of a more diversified approach before putting it to use. —————— This post is for education only and should not be taken as investment advice.