Are Bonds Becoming a Better Investment for Portfolios?

As US Treasury yields climb to their highest levels in decades, Goldman Sachs Research argues that bonds look more attractive on first glance, but that the appeal depends heavily on the investor's time horizon. Christian Mueller-Glissmann, head of Asset Allocation within Goldman Sachs Research, frames the allocation decision around four factors: relative return, relative risk, correlation benefit, and return versus cash.

In the near term, Goldman Sachs Research sees equities holding the edge on relative return. Its baseline expects equity returns over the next few months to be supported by earnings growth, with third-quarter reporting beginning this month and the potential for upside surprises. Mueller-Glissmann cited tech and AI-related earnings momentum as a key driver. On risk, higher yields offer more carry that can cushion portfolios, but bond risk remains elevated amid Middle East tensions, inflation and monetary policy uncertainty, and pressure on some European sovereign issuers, where French and Italian yields have risen relative to German bunds. Equity-bond correlations have been positive, meaning bonds have not reliably hedged equity drawdowns. Over the medium term, Mueller-Glissmann suggests that continued inflation normalization could push equity-bond correlations more negative. Shorter- to medium-term government debt may offer more value, since central bank policy is unlikely to push those yields substantially higher and they yield nearly as much as longer-dated bonds.

Over longer horizons, Goldman Sachs Research's long-term scenario framework, which models GDP growth, inflation and corporate profitability over five to 10 years, points to a more favorable case for bonds. Mueller-Glissmann noted that the optimal bond allocation averaged 40% over the very long run since World War II, aligning with a 60/40 portfolio. He added that the 10-year US Treasury yield of 5.3% exceeds its 4.7% average over the last 250 years, calling it "not a bad starting point" for long-run bond investing. He remains skeptical that the traditional balanced portfolio will be as favorable as before the Covid pandemic, and suggests that investors may need alternative assets such as real assets, hedge funds and private equity, along with factor investing.

Goldman Sachs Research's core framework for the next decade centers on innovation exposure, inflation protection and risk mitigation. Within equities, it favors technology and real assets. Within bonds, it sees a stronger case for inflation-linked securities such as TIPS, given the large increase in real yields this year. Low-volatility and selective high-dividend stocks may reduce risk, and commodity trading advisors have historically offered inflation protection and some crisis protection. The article is published for educational purposes and is not investment advice from Goldman Sachs.