The Wall Street Journal recently published an article titled How You Can Survive a New Era in the Bond Market. The article suggests that investors adjust their bond allocations to tilt more towards high-yield (aka junk) bonds (both corporate and municipal) and global bonds, which tend to yield more than U.S. bonds. This advice resonates with an Op Ed by Burton Malkiel, famed author of A Random Walk Down Wall Street, at the end of 2013.
The case against bonds is straightforward. The best estimate for the expected future return from bonds is their current yield. If you hold a bond until maturity, your total return will be very close to the current yield. There are nuances to this rule. With high-yield bonds, you should expect a total return that is a bit less than the current yield due to the fact that some of these bonds will probably end in default. With bond funds, you don’t necessarily end up holding individual bonds until maturity, so the correspondence between current yield and expected return is a bit weaker. Nonetheless, with current yields as low as they are, bond investors should not expect attractive returns from most bond classes.