Popular investment advice centers on building investment portfolios with a mix of stocks and bonds. But this seemingly sensible advice could be dangerous. The reason? Interest rates may be poised for a multi-year climb, a condition the world has not seen in several decades. This could lead to a steep drop in the value of bond funds. If rates rise in earnest, having the wrong kind of fixed-income exposure could prove very costly indeed.
Interest rates form clear multi-year trends. As the chart below shows, the US Treasury 10-year note fell steadily for 27 years starting in 1873, climbed for the next 20 years, went down the next 20, up the next 40, and down again the last 31. These are very long-term trends.
While it is possible that interest rates could settle in a directionless range for years to come, history shows that it is far more likely that they will form a new trend. The US 10-yr note yield may not go back down to the 1.52% level of 2012 for a very long time.by