“With negative real yields on long-term government bonds, they are unlikely to deliver the sort of portfolio level returns many would expect or need to hit their goals.”
Bruin agrees that the role of government bonds is shifting.
“At the turn of the century, government bonds delivered yields between 4 per cent and 6 per cent, allowing investors to anchor their portfolio around the risk-free asset, and depending on their goals, allocate to growth in more volatile asset classes,” he says.
“With yields unable to drive returns higher, the primary attraction of government bonds is the flight-to-safety characteristic, which is still a feature even at low yields. US 10-year treasuries were yielding less than 2 per cent before Covid-19 and the asset class rallied more than 10 per cent when investors needed it most last year.”
Despite this, Bruin says that the odds are stacked against the asset class over the long term.
“Yields are closely correlated to prospective returns over longer-term holding periods of five years or more, so long-term investors should not expect a significant contribution to total returns,” he says.
“In fact, investors who participated in the US Treasury auction for 30-year bonds in August 2020 are currently holding bonds trading at less than 80 cents to the dollar as yields continue to move higher unabated.
“Government bond investors too need to proceed with caution.”
‘Peace of mind’
Barefoot adds that government bonds still deserve to be allocated within a retirement fund as a “volatility stabiliser”, and not purely on financial grounds, but to offer “peace of mind” to cautious investors. Security comes through as a potential source of funds to be “drawn in the event of a temporary market decline”, ideal for covering a "few years’ worth of expenses".
For Yeates, the issues surrounding government-issued bonds is reason enough to diversify from the traditional 60/40 bond allocation.
“We believe there is value in allocating to hybrid assets like emerging market debt, credit and real estate investment trusts, and believe splitting some of the equity out to balance risk here makes sense.
“So rather than a 60/40 portfolio, people should likely be talking more about a 40/40/20 portfolio,” he adds.
Yet regardless of market conditions, there is one universal truth in retirement planning: ensuring that the needs of the client are met.
“Retirement planning is merely a science of ensuring a client does not run out of money before they run out of life, while living their ideal lifestyle,” says Barefoot.
“How one does this is secondary, though the key aspects to consider are the exposure the client needs to have to the stock market to meet their plan; and the extent in which they structure withdrawals, and manage behaviour, during times of market suppression.”
