Week 22 Day 7: Fixed Income in 2024 and Beyond: Finally Worth Owning Again

From 2009-2021, bond yields were so low (often 1-2%) that they barely kept up with inflation. Bonds were dead weight in many portfolios. Now, with yields at 4-5%, bonds serve their traditional purposes again: reliable income, crisis protection, and portfolio ballast. For the first time in 15 years, the classic 60/40 portfolio works as designed.

The new fixed-income landscape: Short-term Treasuries (SGOV): 5.2% yield with near-zero risk. Better than most savings accounts and available in a brokerage account. Intermediate Treasuries (IEI): 4.3% yield, moderate duration. The sweet spot for most investors. I-Bonds: fixed rate of 1.2% plus inflation. Unbeatable for the first $10,000. TIPS: 2.0% real yield (above inflation) -- the highest since 2008. Investment-grade corporate bonds (LQD): 5.5% yield. Some credit risk but well-compensated. High-yield savings accounts: 4.5-5.0% APY. FDIC-insured, instantly liquid. CDs: 4.5-5.2% for 1-year terms. For investors who have been 100% stocks because bonds were not worth holding, this is the moment to reconsider. A 20-30% allocation to bonds yielding 4-5% provides real income and a genuine cushion against equity declines. The opportunity cost of holding bonds (versus all stocks) has shrunk dramatically now that the yield is meaningful.

The bond yield regime shift from near-zero (2009-2021) to 4-5% (2023-2024) has profound implications for portfolio construction and retirement planning. At the zero bound, the expected real return on bonds was approximately -1% (nominal yield minus inflation). Conventional 4% withdrawal rate calculations assumed a 2% real bond return -- a massive disconnect. The 2020-era reality was that retirees needed approximately 80% stocks to sustain withdrawals, which dramatically increased sequence-of-returns risk. With real bond yields now at approximately 2%, the original assumptions behind the 4% rule are restored. Pfau and Kitces (2014) showed that the safe withdrawal rate is highly sensitive to the starting bond yield: each 1% increase in the 10-year yield raises the safe withdrawal rate by approximately 0.5%. At 2024 yields, the historically safe withdrawal rate rises to approximately 4.5-5.0% -- a meaningful improvement in retirement income. From an asset allocation perspective, the 'cost' of holding bonds (measured as the expected equity premium over bonds) has also shrunk. With equity earnings yields at approximately 4.5% (S&P 500 P/E of 22) and bond yields at 4.5%, the equity risk premium is approximately zero on a forward earnings basis. This historically unusual situation suggests bond allocations should be higher than those recommended during the 2010s low-rate environment.