Are Bonds A Good Investment If The Economy Re-Enters Recession?

Typically, bonds are considered safer than stocksbonds. Within that high yield portion, we have
during an economic downturn. 2008 was anfocused our investments in the higher grades of
anomaly, as concerns weren't about an economichigh yield. Thus, while a downturn could adversely
downturn as much as they were about the entireimpact bond fund values, the impact should be a
system. Because of this, many investors opted togood deal less than that in the stock market.
forego credit risk altogether and invest in U.S.Regarding the risk of inflation, in a downturn in
Treasures. As a result, aside from Treasuries,which wealth is decreasing and credit is
most bond sectors saw sharp drops in value thatconstrained, it's hard to see inflation gaining a
were extremely unusual.foothold in the near term. Thus, it's likely that low
Equally as unusual are the rallies most bondinterest rates will be with us for some time, and
sectors have staged through September of 2009bond values will not be impacted by rising rates
- they have been extremely sharp, in some casesover this period.
more than recovering last year's losses. If theThe bottom line is that bonds are likely to follow
economy does hit a rough patch again, twotheir historical tendency and be safer than stocks.
factors will have a large impact on how bondsOne other key to weathering any potential
behave. The first factor is the riskiness of thedownturn is ensuring that if you are taking money
business issuing the bonds, and second is inflation.from your portfolio, you have set aside enough in
As to the former, we believe an investor shouldcash and truly safe fixed income - Treasuries or
focus on higher credit quality businesses, andCDs are what we use - to cover several years'
invest a smaller portion of a portfolio in high yieldworth of cash needs.