Do you know what the least sexy asset class is? Bonds. Think about it. Have you ever heard of someone making big-league money with fixed income? Neither have I.

But that doesn’t mean that bonds don’t have some redeeming qualities. And it doesn’t mean they can’t play a role in your portfolio.

Bonds just topped off one of their best months in history, and they’re now up 22% year-to-date. I’m using long-term Treasuries or TLT here. It’s a bit more if you tack on interest payments (which are paid out via dividends in TLT) along the way.

By comparison, gold (GLD) is only up about 20%, and stocks (SPY) are up 16% for 2019. Bonds are the king of the hill this year! If you’d like a primer on the bond market, I suggest reading these two articles I penned in 2015: The Teeter-Totter of Debt and Bond. Treasury Bond. They answer the question, “What are bonds?”

Bonds for Passive Players

Passive investors use fixed income primarily as a portfolio stabilizer. They offer diversification and much lower volatility than stocks. Furthermore, stocks and bonds are uncorrelated and often negatively correlated. That means on days where stocks are falling, bonds usually rise. Today is a perfect example. As I type, the S&P 500 (SPY) is down 0.60%. Bonds (TLT), on the other hand, are up 0.56%. Imagine that half your portfolio was in SPY and the other half was in TLT. Though stocks are taking it on the chin today, your account would be virtually unchanged on the session.

If volatility creates bad behavior or increases the likelihood that you’ll do something dumb like sell stocks after a significant correction, then anything that reduces volatility protects you from your stupidity.

Bonds protect you from stupidity. That’s another reason why someone may want to own them in a passive account.

The vehicle that most investors use for exposure to bonds are Exchange Traded Funds (ETFs). There are funds that track every type of bond under the sun, from treasuries and corporates to munis and international. The same goes for duration. You can buy anything from long-term (TLT) to super short-term (BIL). You can even buy a single ETF that grants exposure to everything, like AGG.

Timing the Bond Market

Now, let’s turn to a common question. “When do I buy bonds?” For a passive investor, the answer is when you build your portfolio at the outset, if you’re uncomfortable owning 100% stocks. Again, the role of bonds in a passive account is to offer diversification, reduce volatility, and generate better risk-adjusted returns. I own bonds in my IRA as part of a diversified approach to building wealth.

If you’re trying to speculate on market movements and are wondering when to buy bonds, then the textbook answer is when you think interest rates are going to fall. The reason bonds have rocketed to the moon this year is because interest rates are getting crushed. The specter of slowing global growth, tepid inflation, and a potential recession are killing long-term rates. Just look at the 30-year yield (DGS30:FRED is the ticker in TOS).

Last November 30-year treasury bonds were yielding 3.46%. They’ve since been slashed 43% to 1.97% in less than a year! We’re at historic low rates now. But that doesn’t mean we can’t go lower.

If you’re an active trader trying to play with bonds you only have one ETF worth trading: TLT. Because short-term bonds aren’t as sensitive to interest rates, ETFs that correspond with them (like SHY and IEI) don’t move enough to warrant trading. But TLT has enough volatility to make it interesting. And it has extremely liquid options.

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