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Navigating the bond market used to be a straightforward affair, simply allocating a portion of your portfolio to a bond mutual fund or ETF was as difficult as it got for most people.
But many bond investors, who left their portfolios on autopilot, received a wake-up call last year when their annual statement showed a loss. The U.S. Aggregate Bond Index, the most commonly used benchmark for the bond market, fell by 2.1% last year, its first loss since 1999 and its worst performance since 1994.
If you’re sat there thinking, last year was a one-off, think again. Many market analysts are warning that we are now entering a new era for bonds, with meagr returns and even the occasional loss being the new norm.
With the Federal Reserve having pushed interest rates to record-low levels to boost the economy, bond-market math means returns for the next five to 10 years should be in the low single digits at best, analysts say.
However, that doesn’t mean you should abandon bonds altogether, the diversification and risk protection that bonds provide is still very important, especially for those, such as retirees, who need to protect their portfolios against significant price swings.
So how should you go about tweaking your portfolio to survive this “new era” for bonds?
Tom Lauricella at the WSJ says investors should be thinking in terms of high-dividend stocks, international bonds and ‘junk’ bonds.
Jerome Clark, a portfolio manager of target-date funds at T. Rowe Price Group, told the WSJ that he has been tilting portfolios toward bond investments that are going to move less in lock step as U.S. interest rates rise, such as international bonds, including emerging markets, and high-yield bonds.
This isn’t just a case of shortening duration, its about creating diversity among the bonds you hold.
Chip Castille, head of the U.S. retirement group at BlackRock, says the new bond environment calls for a different approach to building a portfolio. During the multi-decade bond rally, investors could get high returns, diversification and a cushion against big portfolio swings all in one place. Now, he says, “you have to get those characteristics in different places.”
So if you’re looking to re-jig your portfolio, I urge you to read Tom’s full article here!
VC Post: – Decline of insured US municipal bonds may be over- report. – While the worth of insured municipal bonds in the US declined to the lowest level last year to $12.08 billion since the financial crisis, data from Thomson Reuters revealed that the dive may already have come to an end, Reuters reported.
Income Investing: – Newly issued in the muni market: Some optimism. – The muni market spent much of 2013 under a black cloud of Detroit’s bankruptcy and Puerto Rico’s fiscal woes and rising interest rates and generally and miserable performance. But things are looking up! Yesterday Lipper reported that muni-bond mutual funds and ETFs recorded their first net weekly inflow since last May, snapping a streak of 33 straight weekly outflows.
Cate Long: – Is it time to replace Detroit’s emergency manager? – From the outside, it appears that Orr has been handling this process like a corporate bankruptcy, where quick and decisive moves rule the outcome. In contrast, municipal bankruptcies involve retirees with broad legal rights, creditors with various levels of seniority and a large overhang of public opinion. Now Jones, Day is trying to organize creditors ahead of a possible Puerto Rico bankruptcy. I think it may be time for Michigan governor Rick Snyder to think about replacing Orr and possibly his former law firm Jones, Day as Detroit proceeds through its bankruptcy.
StarTribune: – A primer on bonds, interest rates and bond ladders. – What are the benefits of owning a bond fund or individual bonds? How does one determine if Treasury, municipal, corporate, inflation or international bonds are the best fit for your portfolio? If we want to buy a ladder of individual bonds, how do we find someone to help us and how much would we expect that to cost?
AdvisorShares: – Bonds and rates. – Right now the topic de jour in the fixed income space is interest rate risk. The traditional thought is that as interest rates rise, bond prices fall. But looking at history, the high yield market has defied this widely held notion. Let’s examine the four main reasons why high yield bonds have historically performed well during times of rising interest rates.
Citywire: – Kames bond veterans shy away from five-year US treasuries. – Kames Strategic Global Bond managers Philip Milburn and David Roberts have warned that five-year US government bonds (Treasuries) look vulnerable to even the hint of US interest rate hikes later this year.
Investing.com: – US 10 year Treasury note speculators decrease bearish positions. – 10 Year Treasuries: Large futures market traders sharply decreased their overall bearish positions in the 10-year treasury note futures last week to the lowest level since October, according to the latest Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) on Friday.
IndexUniverse: – Long-dated Treasuries looking good again. – To shorten duration was the order of the day throughout 2013 for any investor looking to minimize interest-rate-risk exposure. Indeed, investors poured more than $23 billion into zero- to five-year bond funds last year. But so far in 2014, investors are going longer out on the curve.
Bloomberg: – Treasuries in longest winning streak since September on economy. – Treasuries gained for a third week for the first time since September as reports showed the economy’s momentum sputtering as the Federal Reserve begins to taper bond purchases.
Reuters: – Investment grade firms face tough battle as yield fight rages. – High-quality European corporate credits will be forced to offer juicier premiums and longer maturities on new bonds in order to compete with higher yields available from weaker names.
Bret Jensen: – Getting high yield at good values. – Real Estate Investment Trusts (REITs) had a very tough back half of 2013. Interest rates rose significantly after the Federal Reserve started to seriously talk about the “Taper” in late May. In addition, investors preferred high growth equities within the market’s ~30% rally of the just completed year.
ETF Database: – ETF Insider: High-yield prospects January 19th edition. – Here is a look at ETFs that currently offer attractive income opportunities. The high-yield candidates included in this list meet two sets of criteria. First, each of these funds is deemed to be a high yield prospect because it boasts an annual dividend yield upwards of 5%.
FT: – China slowdown weighs on emerging markets. – The year of the horse is approaching in China, which explains perhaps why there are not many bulls around Asia and other emerging markets.
Barron’s: – The best mutual funds for emerging markets. – Emerging markets, which had a disappointing 2013, were a big theme of the Barron’s Roundtable this year. While our participants may be divided as to the near-term prospects for the world’s developing nations, everyone agrees that investors need to participate in the long term.
Financial Post: – ‘Great rotation’ more about investors fleeing emerging markets. – Investors pulling their money out of emerging markets is more likely the current cause for the “great rotation” than investors leaving fixed income, a new report by Citi Global Markets says.
Barron’s: – Top financial advisor buying “cat” bonds and European stocks. – John Waldron really believes in sticking with a plan. While ascending from a scuba dive off the Bahamas a few years back, he and two of his sons paused about 15 feet below the surface for a routine “safety stop”.
Financial Chronicle: – MFs leave investors spoilt for choice with new equity funds. – Equity mutual fund launches have flooded the industry in the last one month with investors spoilt for choice, as fund houses are vying for money at a time when equity as an asset class is looking better than debt in terms of return prospects.
WSJ: – And the next star fund manager is. – Finding a mutual-fund manager who can beat the market is tough. Winners flame out. Losers revive. The resurgent losers flame out again. No wonder low-cost index-based exchange-traded funds and mutual funds—which seek only to mimic the return of a designated slice of the market—have eclipsed actively managed funds as the investment of choice for private investors.
The Bradenton Times: – Bonds vs. bond funds: Which is better when interest rates rise? – The Federal Reserve has said it expects to begin raising its target rate sometime in 2014. Since bond prices fall when interest rates rise, it may be a good time to pay increased attention to any fixed-income investments you have. Here are some factors to consider when you review your portfolio.
Gross: When does our credit based financial system sputter/breakdown? When investable assets pose too much risk for too little return.
— PIMCO (@PIMCO) January 19, 2014
Didn’t realize that @PIMCO opened a covered bond ETF last week
— David Schawel (@DavidSchawel) January 20, 2014
Even money market funds in a crisis would have a hard time delivering a >2% loss, which would b borne by investors, & not systemic $$
— David Merkel (@AlephBlog) January 20, 2014