Bridgewater: Grappling with the Reality of Zero Bond Yields

This three-part paper by Bridgewater discusses the implications of near zero bond yields and how that may impact the 60/40 portfolio. In typical Bridgewater fashion, using data from markets around the world and decades if not centuries of research, Bridgewater demonstrates the magnitude of the difficult situation investors are facing.

Key Takeways

  • Approximately 80% of all bonds are yielding below 1%.
  • For the first time in modern history, both the short term interest rate and long term interest rate are near 0%. Even in the 1930s and in 2008, when short term rates were 0%, bonds still had a 2%-4% yield.
  • Bridgewater believes we are only left with Monetary Policy 3 to recover from any future economic woes. The most likely outcome from MP3 is inflation.
  • A 60/40 portfolio has historically struggled during periods of inflation.
    • The net of it is that zero bond yields reduce the return of the traditional 60/40 portfolio while raising its downside risk relative to its upside potential.

      - Bob Prince and Greg Jensen

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