Private Investment Management Portfolio Manager

 

Are We Heading For

“The Lost Decade” In Bonds?

 

Most of us have forgotten about “The Lost Decade” in the financial world.  It was a period between 2000 and 2009 where the total return for the S&P 500 was virtually zero due to the two large recessions at the beginning and end being unable to offset any gains.  There were trading opportunities in that investment, and other investment categories that were better but for the most part many investors were treading water.

Nobody wants to go through a period like that again in any investment so hopefully we are a little smarter and a lot more aware of our surroundings and what’ happening with the financial landscape.

Bonds are usually part of an investment mix to be safe and serve as a shock absorber for situations that will hurt stock prices, and are in an investment mix for diversification. 

What most people don’t understand is that bonds can drop in value.  They drop in value when interest rates in the market go up- and when they go up a lot, bonds drop a lot.  We point this out to make you aware that the investment you may think is safe still has to be monitored and paid attention to. 

 

 

 

 

 

I think you have less to worry about if you own individual, high quality bonds.  They have a set maturity and if you hold the bonds until they mature, then assuming there is no credit event, you should get your principal back.  With inflation you may get back less in “purchasing power” but you still get your capital back.

That’s not always the case with bond mutual funds.  I hate dating myself, but back in the 80’s when we had interest rates go up a lot, government bond mutual funds dropped like a rock.   People were spooked because a fund consisting of government securities would drop so much in value. 

The fed said it was going to raise short term interest rates.  Many economists are predicting rates are going to rise.  I think that there are many investors invested in mutual funds that don’t understand interest rate risk, and if and when rates go up they may get scared and start redeeming their mutual funds.  The manager that runs these funds then has to go to the market and sell bonds.  If enough people get scared the potential is there for a lot of selling.

Another dynamic   I see going on after a great year in the stock market is that people are getting more confident and want to have a greater allocation in stocks.  In many cases the money flows from, you get it, from bonds.

We also have a potential headwind if the tariff issue isn’t resolved.  Foreign governments are a big buyer of government bonds and if they cut back their purchases to “make a statement” other buyers may demand higher rates.  The argument can be made that U.S. Treasuries are attractive to foreign buyers at these levels and they won’t boycott however we need to monitor the situation. 

Since the trend may be changing, it’s important for you to evaluate your portfolio and your type of ownership.  You need to evaluate both your interest rate and credit risk and make sure it’s appropriate for your situation, and actually understand the risks.

 

 

 

 

 

 

All investing involves risk, including loss of principal Past performance is not indicative of future results and there is no assurance that any forecasts mentioned in this report will be attained.

Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and/or principal. This risk is heightened in lower rated bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.

The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.

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