A resource for debunking the investments myths peddled by the financial press and Wall Street hype and presenting rational,sensible investing approaches based on sound research and academic findings.
This blog is maintained by Lawrence Weinman MBA an independent Registered Investment Advisor www.lweinmanadvisor1.com
I have been writing abouut reducing duration in bond portfolios for at least a year. my bolds
Where Bond Investors Are Hiding From the Threat of Rising Rates
By Eric Balchunas - Jun 5, 2013
If the financial markets were a horror show (and sometimes they are), investors know what would be behind that white hockey mask today. The killer stalking portfolios would be revealed as...rising interest rates.
So far this year, $16.3 billion has gone into fixed-income exchange-traded funds designed to have low sensitivity to interest rates, according to Bloomberg data. That's a 35 percent jump since the end of last year. And while articles like this one come out at least once a month, and there have been false alarms about rising rates, the ETF flows -- which many consider to be the smart money -- show that investors are seriously creeped out.
The latest scare sending them into these (jargon alert) "short duration" ETFs is the nearly 40 percent jump in the 10-year Treasury yield to 2.14 percent. The move took place in just one month. Duration is a measure of how sensitive a bond is to an increase in interest rates. For example, if your bond ETF has a duration of 6 years, that means the price would go down six percent for a 1 percent increase in interest rates. Start doing the math on that and you can see why people are getting jittery.....
The SPDR Barclays Short-Term High Yield ETF (SJNK) is a short-duration kid brother to the SPDR Barclays High Yield Bond ETF (JNK). The portfolio of $10 billion JNK, the largest high-yield bond ETF in the world, would lose 4.3 percent in value for a 1 percent rise in interest rates (a duration of 4.3 years). SJNK's portfolio has a duration of two years and a yield of 6.12 percent -- just below JNK’s 6.4 percent yield.The similar yields are one reason JNK has seen $1.7 billion in outflows this year.
SJNK's low duration explains why its total return has been better recently compared to JNK's -- 3 percent this year, versus 2.3 percent for JNK. In the past month, which has been tough for junk bonds, SJNK is down 0.98 percent, while JNK is down 2.41 percent. Of course, while these ETFs ratchet down interest rate risk, they still have the credit risk that comes with junk bond investing.