The Hammer in the Toolbox: Why Bonds Still Matter and the Benefits of Many Tools

by: Evan Wirkkala, Chief Investment Officer

I’ve spent a fair amount of time on projects around the house this summer. Partly out of practical necessity, but also because it gives me an excuse to spend time with my son, who has an intense blend of an engineer’s mind and a creative explorer’s heart. In other words, he likes tearing things apart and, sometimes, putting them back together with his father.

Amidst this season of home projects, we recently found ourselves wandering through an antique shop in Old Town Snohomish, north of Seattle. A large section of the store was dedicated to old tools. Many were rusted pieces of forged metal that I couldn’t even identify. Others were mechanical contraptions that have long since been replaced by fancy precision electronics.

And then there was a pile of hammers. Some were probably 75 years old or more, yet they looked remarkably similar to the new one hanging in my garage. It struck me that some tools just get the job right. No innovation required.

Investing has a few tools like that too. Bonds are one of them.

A Tool That Still Works

Bonds are hardly innovative. Businesses and governments have been borrowing money from investors for centuries. The mechanics are straightforward: lend someone money, collect interest along the way, and, assuming all goes as planned, get your money back at the end. It’s all very simple.

But simple does not mean ineffective. At today’s yields, investment-grade bonds can once again provide meaningful income while offering liquidity and a degree of capital stability that is difficult to replicate elsewhere. For investors who spent much of the 2010s earning very little income on their bonds, that is an important change.

The trouble is that somewhere along the way, investors started asking bonds to do a lot more than generate income and preserve capital.

In the traditional 60/40 portfolio, bonds became the sole counterweight to stocks. They are expected to provide income, reduce volatility, preserve capital and, perhaps most importantly, rise when stocks fell. For much of the past two decades, they often did exactly that.

But that relationship is not a law of investing, like the law of gravity. It was a product of the economic environment.

Recent research from the Federal Reserve Bank of San Francisco makes that point particularly well. For much of the 2000s and 2010s, markets were dominated by concerns about weak demand. When economic growth disappointed, inflation generally fell with it. Stocks declined, interest rates moved lower, and bond prices often rose.

Today, Fed researchers find evidence that the perceived risks have shifted toward the supply side of the economy. The COVID pandemic, energy disruptions, tariffs, changing immigration patterns, and geopolitical conflict can create a different combination where bouts of weaker growth are accompanied by higher inflation. In that environment, stocks can fall while rising interest rates push bond prices lower at the same time.

We saw just how painful that combination could be in 2022, and we are living a lesser version of it again in 2026.

This does not mean bonds are obsolete. It does suggest we should be more precise about the job we are asking them to do in portfolios.

What Job Should Bonds Do?

The contractual nature of bonds gives investors something valuable: visibility into cash flows. With an individual bond held to maturity, we know the interest it is scheduled to pay and when the principal is due to be returned, assuming the issuer meets its obligations.

That makes bonds a reliable source of income. With many investment-grade bond yields back near 5%, investors are once again being paid meaningful income without having to reach far down the credit spectrum.

We also ask bonds to provide liquidity. Investment-grade bonds can provide a relatively stable source of capital for spending needs, rebalancing, or simply reducing the amount of a portfolio exposed to equity-market risk.

Finally, bonds can protect against economic weakness. In a traditional recession where growth and inflation are both falling, investment-grade bonds can still be an excellent diversifier. If interest rates decline in response to a recession, bond prices can rise precisely when stock prices are under pressure.

These are important jobs. They justify a meaningful allocation to bonds in a modern portfolio.

But there are jobs I am increasingly reluctant to assign exclusively to them.

I don’t want bonds to carry the full burden of diversification when stocks fall. I don’t want them to be our only defense against inflation, geopolitical shocks, or monetary uncertainty. And I don’t want to assume that every future stock-market decline will be accompanied by falling interest rates and rising bond prices.

This doesn’t mean we toss the hammer out of the toolbox. It means we complement it with other tools.

A Bigger Toolbox

This is why we recommend Strategic Diversifiers such as gold, real estate, global currencies, and systematic trend-following strategies. Each brings something different to the table.

Some can help when inflation is the problem. Others respond differently to changes in currencies, real assets, interest rates, or persistent market trends. None is expected to work in every environment, and none is intended to replace bonds. They are in the toolbox because different risks require different tools.

We are applying the same thinking beyond public markets. Private real estate, private income strategies, infrastructure, private equity, and other private-market investments can create sources of income and return that are not available in traditional stock and bond portfolios. We continue to look for new ways to enhance income, broaden opportunity, and build portfolios that are less dependent on any single economic outcome.

None of this diminishes the importance of bonds.

At today’s yields, bonds remain one of the most useful tools we have. They can provide meaningful income, liquidity, capital preservation, and valuable protection when economic weakness pushes interest rates lower.

But even a very good tool should not be asked to do every job.

Some of the tools my son and I found in that Snohomish antique shop were clearly relics of another time. Others looked as useful today as they probably were 75 years ago.

Bonds are clearly in the second category.

We just believe a modern portfolio deserves a bigger toolbox.

Every portfolio is built to serve a purpose. If you’d like to discuss whether your investment strategy is positioned for today’s changing market environment, we’d welcome the conversation. Contact us here: Start the Conversation