Low interest rates are eroding one of Wall Street’s long-standing investment principles.
The traditional 60% stock, 40% bond portfolio — a popular allocation strategy meant to generate steady income while guarding against volatility — is falling out of style, Van Eck Associates CEO Jan van Eck told CNBC’s “ETF Edge” on Monday.
“The phrase we’ve been talking about with clients is ‘the 40% is broken,’ meaning the 40% of your portfolio that’s supposed to be in bonds,” the CEO said.
The main culprit is low interest rates, according to van Eck. The yield on the U.S. 10-year Treasury bond has fallen from some 1.8% a year ago to just under 0.9% as of Tuesday, a huge hit to its effectiveness as a hedge against market turmoil.
“Institutional investors, advisors, individuals, no one wants to own a bond with that low an interest rate,” van Eck said. “You can’t make any money [on] that over any kind of time horizon.”
That rationale has been contributing to outflows from bonds and bond-based exchange-traded funds in recent months, even as the overall ETF industry just surpassed $5 trillion in assets for the first time.
“Investors have been fleeing bonds,” van Eck said. “Balances at Merrill Lynch are down 49% in terms of their bond holdings over the last several years. So, everyone’s running away from the 10-year and trying to find alternatives.”
As that drives investors to consider hedges such as gold, it will likely slow the bond story, the CEO said.
“Global growth is really underappreciated, meaning interest rates could go up, which would be bad for bond prices,” he added. “Bonds are still, I think, $1 trillion in the ETF universe, so, it’s not zero, but I do think bonds face headwinds.”
In February, Jeremy Siegel, professor of finance at the University of Pennsylvania’s Wharton School, told “ETF Edge” that the 60/40 portfolio model “just won’t be able to cut it anymore.”
Investors continued to dump bonds this week after another positive report on Covid-19 vaccine progress, this time from Moderna.
