Here is an interesting chart comparing the correlation of various asset classes to the S&P 500 over the last 5 years. Chart is from Richard Bernstein Advisors, found via The Reformed Broker.
A negative correlation between two asset classes means that they tend to move in opposite directions. While long-term US Treasury bonds have been the most strongly uncorrelated, it is also worth noting that intermediate-term US Treasuries (5-7 years) were nearly as uncorrelated. Of course, this is the past and correlations can and will change.
Still, this would seem like good news for people who hold a “total” bond fund like the Vanguard Total Bond Market Index Fund (VBMFX, BND) or iShares Barclays Aggregate Bond Fund (AGG) as these contain ~70% US government bonds and have an intermediate average maturity. You want your bonds to serve as a hedge against stock movements, and they did over the past 5 years while still maintaining positive returns (~4% annualized for AGG, ~15% annualized for S&P 500).
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Jonathan, with interest rates expected to rise would you still hold your non stock portfolio in BND or are there better options?
Rising rates are expected, but they’ve been expected for a long time. Who knows what will actually happen. Could go up, or could stay pretty low for 10 more years. The best plan is to pick something and stick with it, be it BND or something else. I’m personally 50% short to intermediate muni bonds and 50% TIPS.