Bonds are Taking a Hit. A Steadier Place to Diversify Further

"Bond funds have taken some small backward steps in recent weeks, thanks in part to the rising risk of Fed rate hikes instead of rate cuts. The war in Iran isn't over yet, and there's concern that things could escalate further, with oil prices rising above $110 per barrel, a level that would have been unheard of just a quarter ago."

"With the conflict in the Middle East, we're now looking at no rate cuts for the year and maybe even a hike if things get really bad and the energy shock spreads through the economy faster than anticipated. Either way, consumers are poised to feel the impact far beyond the gas pump."

"As bonds become more correlated to stocks on the downside, perhaps it's time that investors consider furthering their diversification to encompass other assets that might help stabilize in a time of crisis."

Bond funds have recently struggled due to rising Fed rate hike risks and ongoing conflict in Iran, leading to increased oil prices. The 60/40 portfolio faces new challenges, with concerns that stocks and bonds may decline together. An energy shock could further impact bonds, with consumers likely to feel inflationary pressures. Companies are already raising fees, indicating potential consumer-facing inflation. Long-duration bond ETFs may remain volatile, prompting investors to diversify into other assets to stabilize during crises. A bear-case scenario could lead to stagflation, necessitating preparedness for inflationary climates.

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