In a volatile market, do bonds still do what I want them to do?

Most people invest in bonds for one or all of the following reasons: defence, income and diversification. Even in this time of heightened volatility, we believe that the role of bonds in a portfolio hasn’t changed.

Defence: First and foremost in a volatile market – capital preservation

Most bond investments are designed to provide regular income and capital preservation. As such, they are generally considered to be a lower risk investment than stocks.

Despite the current volatility, the nature of bonds hasn’t changed and it is important to distinguish between short-term price movements and actual capital loss. Even if a bond’s price changes in the short term, as long as the issuer of the bond remains solvent, an investor’s capital should be repaid in full.

As the chart to the right shows, historically, bond market declines have been much less severe than the stock market declines in volatile periods.

Australian bonds have historically offered greater capital preservation

Income: A reliable, consistent stream

Earning income is an important goal for many investors and they have often relied on bonds to help them achieve it. Bonds generate income in the form of set payments, or interest, so investors get reliable income even in difficult market environments. Combining different bonds across the global bond markets allows bond managers to seek out the best income-generating ideas in any market climate, targeting multiple sources of income from a global opportunity set.

As always, we encourage investors in bonds to consider a longterm time horizon. Holding bonds for the longer-term allows investors the benefits of realising the cash flows from these interest payments in the form of total returns and income.

Diversification: Reducing overall portfolio risk

Bonds have historically enhanced an investor’s ability to reduce volatility and overall portfolio risk while maintaining attractive returns. Because they generally have a low or even negative correlation to stocks (i.e. they tend to react differently to the same market event), they offer the potential for greater return stability.

Take this chart as an example: adding a 40% bond allocation to complement the stock portion of the portfolio, reduces the volatility from 13.28% to 7.83%, while only reducing the average return by 0.05%.

Even in today’s more volatile environment, we believe the reasons to hold bonds haven’t changed and that investors that stay the course during this period may be better placed to achieve their long-term financial goals.

Diversification: Reducing overall portfolio risk 


Past performance is not a guarantee or a reliable indicator of future results.

This material has been distributed for informational purposes only. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Outlook and strategies are subject to change without notice. Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation.

Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Management risk is the risk that the investment techniques and risk analyses applied by PIMCO will not produce the desired results, and that certain policies or developments may affect the investment techniques available to PIMCO in connection with managing the strategy. Diversification does not ensure against loss.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

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