Bonds' newfound unpopularity is an active manager's opening
A Financial Planning essay argues the 2022 correlation break and higher yields make a second look at fixed income worthwhile.
For the better part of sixteen years, the bond sleeve was a dependable afterthought. Stocks outran it. Rates hovered near historic lows. Passive investing taught investors to file fixed income under 'portfolio ballast' — useful, boring, easy to ignore. Nobody needed a second opinion.
A Financial Planning opinion essay argues that the second opinion is overdue. The title says it plainly: bonds are always boring, now unloved, and deserve a second look.
The 2022 break
The case rests on the 2022 correlation break. Rates started rising in 2021. Through the wreckage of 2022, stock and bond correlations picked up and have stayed elevated since, reaching levels not seen since the late 1990s. Bonds were supposed to steady the ship that year; instead they helped drag it down. Trust in the old diversification story has eroded.
The essay's author notes that stock-bond correlation has never been a law of nature. It has historically been inconsistent; investors simply got used to the uncorrelated version. Phil Toews, writing in The Behavioral Portfolio, pushes the point further: bonds often add stability, but their effectiveness depends on valuations, interest rates, inflation, and the fact that corporate stocks and corporate bonds ultimately rely on the same companies. The clean, uncorrelated era was a regime, not a structural guarantee.
What the zero-rate years hid
The erosion of trust redirected investor enthusiasm. Alternatives, private credit, and esoteric products with compelling stories began drawing attention. Some may have a genuine role in portfolios, the essay allows; some may have mechanics only a friendly neighborhood CFA fully understands. Its suggestion is blunt: maybe investors have been looking in the wrong place.
The flows that have returned to bonds do not amount to a vindication. Much of the recovery, the essay says, appears driven by system allocation — 401(k) contributions, model defaults, institutional plumbing — not a wave of renewed investor affection.
The bigger point is that the fixed-income market today is fundamentally different from the zero-rate years. Yields are higher, the essay notes, and that alone changes the nature of the conversation.
For RIAs, the essay is less a prescription than a prompt. The mechanical money rebuilding bond allocations through models and retirement plans will keep the asset class funded, but it does not answer whether the sleeve is positioned for the market it actually faces. The old assumptions, the essay implies, are due for an audit. The cost of skipping it may be the next 2022.
The Portfolio