'Macro' Forces in Market Confound Stock Pickers
wsj Dec 18, 2010:
The Return of The Market-Beating Fund Manager
The Stage Is Set for Stock Pickers to Shine. Here's What You Need to Know to Find the Best
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
'Macro' Forces in Market Confound Stock Pickers
The Return of The Market-Beating Fund Manager
The Stage Is Set for Stock Pickers to Shine. Here's What You Need to Know to Find the Best
Bond Funds Take It on the Chin
By JANE J. KIM
Bonds are supposed to be safe,(in my view anyone that understands bonds knows that long duration bonds are in fact quite risky remember a 20 year duration bond falls 20% in value with a 1% increase in rates)
but the world's five largest bond mutual funds have all posted losses in the past two months—with three of them losing more in December than in November.
As the losses mount, investors are pulling back. They yanked $5 billion out of bond funds during the week ended Dec. 15, pushing the five-week total outflow to a record $7.6 billion, according to EPFR Global, a Boston fund-flow tracker.While the five biggest bond funds are still up for the year, they have performed poorly of late. The $250 billion Pimco Total Return Fund, the world's largest bond fund, lost 3.42% from Nov. 4 through Dec. 17, compared with a 2.51% loss in the BarCap U.S. Aggregate Bond Index over the same period, according to Morningstar. The second- and fourth-largest bond funds, the $89 billion Vanguard Total Bond Market Index Fund and the $38.4 billion American Funds Bond Fund of America Fund, respectively, have lost 2.64% and 2.79%.
A selloff in U.S. Treasurys is spreading to most bond sectors, including corporate and municipal bonds. The yield on the benchmark 10-year Treasury, which moves in the opposite direction of price, has jumped about a full percentage point in the past month on fears that aggressive monetary and fiscal stimuli could trigger inflation and higher interest rates down the road.
"This is the first time you've seen a broad selloff across bond sectors since October 2008," says Miriam Sjoblom, an analyst at investment-research firm Morningstar Inc. Back then, at the worst of the financial crisis, the Barclays U.S. Treasury Index lost a fraction of a percent, while other credit sectors got slammed.
WSJ reports on the steepening yield curve,
When yield spreads widen, banks are the big winners because the lower short-dated yields mean they can borrow cheaply to fund short-term obligations while lending out to businesses and consumers at higher rates.
Higher long-dated Treasury yields also help pension funds and insurance companies cover their long-term obligations. The flip side is that higher yields push up mortgage rates. Homeowners' mortgage rates tend to track the 10-year Treasury yield, and higher rates hurt the already-struggling housing market. It also gets more expensive for companies to borrow in capital markets.
Bill Gross’s Pimco Total Return Fund, the world’s largest mutual fund, is expanding its policy to allow investments in equity-linked securities for the first time since 2003.
Pimco Total Return may put as much as 10 percent of assets in securities including preferred stock and convertible bonds as early as the second quarter of next year, according to a filing today with the U.S. Securities and Exchange Commission. The fund won’t invest in common stock, the Newport Beach, California- based firm said.
Gross, who said in October that asset purchases by the Fed will probably signify the end of the 30-year rally in bonds, has invested the Total Return fund in a mix of government-related debt, mortgage securities and emerging market bonds. A top performer over the past five years, the fund trailed most of its large rivals during a debt selloff in the past month.What was particularly strking to me was that according to Morningstar venturing into convertible bonds and preferred stock is commonplace among actively managed fund. And the Morningstar analyst whose role is supposedly to look out for the interests of the retail investor sees nothing wrong with this:
“This brings Pimco in line with other bond funds in the same category and gives them more flexibility,” Miriam Sjoblom, an analyst with Morningstar Inc. in Chicago, said in an interview. “In moderation, this could increase returns without adding considerable risk to the portfolio,” she said.
Bill Gross bets big on muni bonds
Plows $4.4M of his own money into tax-exempt funds; 'optimism about a recovery'
December 14, 2010Bill Gross, the co-chief investment officer of Pacific Investment Management Co., spent $4.4 million of his own money this month to purchase shares of five municipal-bond funds run by his firm after tax-exempt debt tumbled.
Gross, 66, who manages the world's biggest bond fund at Pimco, has more than doubled his holdings of the firm's closed-end municipal bond funds, according to Securities and Exchange Commission data. He bought about 451,000 shares of Pimco municipal bond funds in December, bringing his total holdings to about 878,000 shares.
The municipal bond market has dropped in the past two months due to a jump in new bond issuance and rising Treasury rates. Tax-free holdings lost 2.29 percent in November, the third consecutive monthly slide and the longest since 2004, according to the Bank of America Merrill Lynch Municipal Master Index, which accounts for price changes and interest income.
“Bill Gross's leadership in being a buyer is notable as it reflects his optimism about a recovery in the underlying fundamentals of municipal bonds,”....
He bought 50,000 shares of the Pimco Municipal Income Fund III on Dec. 10 at an average price of $9.75, according to public records. That fund hit a 52-week high of $12 on Sept. 8
VWO | Vanguard Emerging Markets | Vanguard | 1,734.80 | |||||||||||
VO | Vanguard Mid-Cap | Vanguard | 1,322.14 | |||||||||||
IWM | iShares Russell 2000 | BlackRock | 1,201.37 | |||||||||||
VB | Vanguard Small-Cap | Vanguard | 833.40 | |||||||||||
IWD | iShares Russell 1000 Value | BlackRock | 669.54 | |||||||||||
SLV | iShares Silver | BlackRock | 567.84 | |||||||||||
VBR | Vanguard Small-Cap Value | Vanguard | 494.27 | |||||||||||
VBK | Vanguard Small-Cap Growth | Vanguard | 484.19 | |||||||||||
FAS | Direxion Daily Financial Bull 3x | Direxion | 404.85 | |||||||||||
MINT | PIMCO Enhanced Short Maturity Strategy | PIMCO | 403.29 |
Pimco Total Return Fund Slips In Past Month; Investors Pull Money
Posted by Murray ColemanThe Bill Gross-led Pimco Total Return Fund (PTTRX) faced $1.9 billion in redemptions during November — its first month of net outflows in two years, according to Morningstar.Another aspect of the large exodus from this fund is another issue I have raised before. As a "go anywhere fund" investors have no idea how the portfolio is allocated as to credit quality, bond category, duration and even nationality of the bond's held in the portfolio, The investment in this fund is less an investment in an asset class and more a bet that manager Bill Gross would continue his market beating record. It was inevitable that the fund would stumble and inevitable that hot money would flee the fund once that happened, The fund is down around 6% mtd, underperforming the index (see 3 month chart vs the the total bond market etf AGG)
A separate report by Bloomberg comparing return data over the past 30 days, through Dec. 8, found that PTTRX lost more than all but one of the 10 largest bond mutual funds.The reason behind the decline may be because Pimco has revised it's much publicized forecast of the "new normal with lower returns and slow growth. It seems plausible based on this view they would hav been positioned on the long end of the yield curve. The fact that their performance underperformed the indices in a month when the long bond sold off sharply is additional evidence leading to that conclusion,
The only top 10 bond fund that did worse was the Vanguard Inflation-Protected Securities Fund (VIPSX).
Equities climbed on Dec. 9 when Mohamed El-Erian, the chief executive officer and co-chief investment officer of Pimco, raised his forecast for next year’s U.S. growth as policy makers spend up to $600 billion to buy Treasuries through so-called quantitative easing. Pimco said the economy may grow 3.5 percent in the fourth quarter of 2011 from the year-earlier period, up from 2.5 percent.
Pimco, manager of the world’s biggest bond fund, said since May 2009 that gains in financial assets would be below historical averages for years to come. Bill Gross, the other co- chief investment officer, said on Dec. 3 that a Labor Department report showing hiring trailed forecasts in November shows gross domestic product isn’t expanding fast enough to sustain market rallies.
‘Stable Wings’
“The old normal was 6 to 7 percent,” Gross said in a Dec. 3 radio interview on “Bloomberg Surveillance” with Tom Keene. “The new normal is a 3 percent plus or minus nominal GDP. It speaks to 2 percent growth and 1 percent inflation. We are running at a half-size-paper-airplane type of economy as opposed to one with stable wings and full thrusting jet engines.”
Over the years, the funds research company Morningstar Inc. has found that investors can profit if they invest in the most-unloved stock-fund categories and hold on for the next three to five years. Sometimes, the least-popular categories can be narrow ones on which you might not want to place a big bet.
But this year, through October, the biggest redemptions by investors have been in three bread-and-butter categories focused on large stocks in the U.S. and abroad: Morningstar's large-growth, large-value and world-stock groupings.
If your gut reaction is, "Thanks, but I don't do charity cases," think again. It's an old story: Ugly-duckling mutual fund transforms into profitable swan.
Chicago-based Morningstar found that buying what other investors sell generated a 3.7% annualized gain over the decade through July, while the most-loved fund categories lost an average 1.2% a year and the Standard & Poor's 500-stock index shed 0.8%. (The most-loved categories this year through October: diversified emerging markets, commodities and foreign large blend.)
We looked for diversified U.S.-stock funds in the top 20% of their Morningstar Inc. category for the past five or 10 years but now in the bottom 10% of their peer group so far in 2010. There are more than a dozen such funds that recently had at least $500 million in assets.
Money left bond mutual funds in the two weeks through Nov. 23, according to the Investment Company Institute, the first outflows since December 2008, roughly when the bond bull market began.
Even seemingly bulletproof emerging markets have suffered bond-fund outflows for two straight weeks, according to data tracker EPFR Global.
These risk-avoiding hiding places include the obvious— high-grade bonds and gold—but also stretch to tactical asset allocation strategies and owning "volatility" as an asset class, through such things as futures on the CBOE Market Volatility Index, or VIX.
Zlotnikov pointed out a few months ago that investors "will go to great pains to avoid repeating the most recently made mistakes, but have few qualms about repeating mistakes from long ago. Today, this shows up as investors' extrapolating of the historically highest volatility" of 2008 into 2009.
Gordon Fowler Jr., CEO and chief investment officer at wealth manager Glenmede, made a similar point, suggesting last month that "protection against extreme outcomes…has become unprecedentedly expensive."
This is the muscle memory of the crisis still animating investor behavior. The iPath S&P 500 VIX Short-Term Futures exchange-traded note (ticker: VXX), which profits from rising volatility, has more than $1.4 billion in assets, despite having launched in January 2009 and the fund having lost almost 90% since inception. For more than a year, prices on the relatively newly tradable futures on the VIX—which measures the options market's implied forecast of stock index jumpiness—have shown a steep premium in more distant contracts. This means traders have consistently bet on a surge in market turmoil a month or three or six hence.
Zlotnikov pointed out a few months ago that investors "will go to great pains to avoid repeating the most recently made mistakes, but have few qualms about repeating mistakes from long ago. Today, this shows up as investors' extrapolating of the historically highest volatility" of 2008 into 2009.
Just last week, BofA Merrill Lynch introduced a Global Financial Stress Index, "a comprehensive, cross-market gauge of risk, hedging demand and investment flows. The index is designed to help investors identify market risks earlier and more accurately than commonly used risk indicators, such as the VIX index," according to its news release.
The index might well do just that, perhaps even better than well-established indicators such as the Bloomberg Financial Conditions Index. (It certainly does the job in back tests, of course.) Yet the fact that, to the research folks at the No. 2 U.S. brokerage house, this seemed a propitious time to initiate an early-warning system for financial upheaval says plenty about the mindset of investors.
Effective money, our favored broad money aggregate for the US, is the sum of plain old bank money – M2 or savings and checking deposits – and shadow money, which is based on the outstanding value of liquid debt securities which can be repo’d quickly for cash. (The thought is if a $100 security is so liquid that you can borrow, say, $95 in cash by posting the security as collateral, then owning the security will affect your behavior just like owning $95 in cash.)Because effective money is influenced by monetary policy, fiscal policy, bank balance sheet expansion, and shadow bank credit expansions (e.g. ABS funding of auto loans), our aggregate is broad enough to tell us something useful about the economy and the possible direction of inflation.Effective money was $27.7 trillion in February 2007 and collapsed to $25.7 trillion by late 2008. Much of the fall was in private shadow money, which suffered from a collapse of funding liquidity (rising haircuts), a sharp fall in bond prices, and very weak net issuance. However, this deflationary shock was offset by a public balance sheet expansion. Later in the recovery private shadow money rebounded, and our latest estimate of effective money is now $33.8 trillion
, parts of the expansion – especially on the monetary side – are easily reversible with central bank balance sheet and interest operations including the payment of interest on reserves, which could cull any sharp increase in bank credit expansion.Fourth, although credit expansion has begun to revive in certain places, there really is no sign yet of runaway demand growth in the US. And unemployment and the output gap remain very high.But of all these reasons, the one we would urge monetarists and inflation worriers to ponder most is the first....
So far at least, we suspect that there has been nowhere near enough money printing to raise the risk, let alone guarantee, runaway inflation.
As far as Japan is concerned, the situation is very clear. And it’s a good example. I’m glad you brought it up, because it shows how unreliable interest rates can be as an indicator of appropriate monetary policy.
During the 1970s, you had the bubble period. Monetary growth was very high. There was a so-called speculative bubble in the stock market. In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasi recession ever since. Monetary growth has been too low. Now, the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?”
It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.
The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.(why? because velocity did not increase)
Munis see worst falls since Lehman collapse
By Nicole Bullock and Michael Mackenzie in New York
Published: November 30 2010 18:34 | Last updated: November 30 2010 18:34
US municipal bond markets have suffered their worst month since the collapse of Lehman Brothers, amid rising interest rates, a flood of new issuance and fears over possible defaults by cash-strapped states and cities.
The Barclays Capital municipal bond index was on track on Tuesday for a fall of 2.2 per cent in November, the biggest monthly loss since September of 2008, when Lehman Brothers went bankrupt and the index dropped 4.7 per cent.
The poor performance was driven, in part, by higher Treasury yields as US government debt prices fell for the second month in a row during November. The total return for US Treasuries was -0.87 per cent for the month according to Barclays Capital and the yield on 10-year notes was set to close out the month at 2.77 per cent, up from 2.60 per cent at the end of October.
Other asset classes also dipped last month, with US corporate and mortgage bonds lower.But as I have mentioned in an earlier post the losses investors are facing in another "hot" asset class: international bonds particularly those of developed countries. Here are returns for the month of november for bond etfs:
Intl Bond Etfs (IGOV yellow,WIP green,emlc black, PICB blue,MUB red) |
One conundrum for investors is how more aggressive tightening would play out in the currency markets. Most investors have been operating on the assumption that with the Fed keeping interest rates at zero for the foreseeable future, any moves by emerging-market countries to raise interest rates would attract even more money from yield-hungry investors.
This is an especially important question for investors who have been piling in to emerging-market bonds priced in local currencies. Many argue it's a no-lose situation, where even if bond prices fall because of inflation pressures, rising emerging-market currencies will still provide them a profit.
But since China tightened in October, the dollar has been on the upswing, albeit with help from concerns about the European debt crisis. In the current market environment, however, higher interest rates in China have been equated with risk aversion, and thus a stronger dollar. The U.S. dollar index is up roughly 4% since mid-October.
Traders say that until expectations for emerging-market rate increases become more widespread, they could continue to prompt safe-haven buying of U.S. dollars.
Mr. Murray felt compelled to write it is itself a remarkable story of an almost willful ignorance of the futility of active money management — and how he finally stumbled upon a better way of investing. Mr. Murray now stands as one the highest-ranking Wall Street veterans to take back much of what he and his colleagues worked for during their careers.
The book asks readers to make just five decisions.
First, will you go it alone? The two authors suggest hiring an adviser who earns fees only from you and not from mutual funds or insurance companies, which is how Mr. Goldie now runs his business.
Second, divide your money among stocks and bonds, big and small, and value and growth. The pair notes that a less volatile portfolio may earn more over time than one with higher volatility and identical average returns. “If you don’t have big drops, the portfolio can compound at a greater rate,” Mr. Goldie said.
Then, further subdivide between foreign and domestic. Keep in mind that putting anything less than about half of your stock money in foreign securities is a bet in and of itself, given that American stocks’ share of the overall global equities market keeps falling.
Fourth, decide whether you will be investing in active or passively managed mutual funds. No one can predict the future with any regularity, the pair note, so why would you think that active managers can beat their respective indexes over time?
Finally, rebalance, by selling your winners and buying more of the losers. Most people can’t bring themselves to do this, even though it improves returns over the long run.
This is not new, nor is it rocket science. But Mr. Murray spent 25 years on Wall Street without having any idea how to invest like a grown-up. So it’s no surprise that most of America still doesn’t either.
Investors pulled an estimated $4.78 billion out of municipal-bond mutual funds last week, according to the Investment Company Institute, as oversupply and other concerns shook the muni market.and from the ft the report is here
That figure represents the the biggest estimated withdrawal since the fund industry trade association began tracking weekly muni-fund outflows in January 2007. The second greatest estimated outflow was $4.2 billion in October 2008 during the heat of the financial crisis.
The outflow for the week ended Nov. 17 ends a roughly three-month run of inflows into long-term U.S. mutual funds and comes amid a weeks-long slump in muni-bond prices, triggered by a surge in issuance ahead of uncertainty about the extension of a popular federal program that provides subsidies for taxable bonds issued by state and local governments. That spike in issuance caused yields, which move inversely to a bond's price, to surge.
"When you see falling bond prices and falling bond-fund returns, it's not unusual to see some outflows from bond funds," says Brian Reid, chief economist of the ICI.
A drop in the prices of the muni bonds held by mutual funds decreases the overall returns the funds pay their investors, causing some investors to cash out.
The estimated $4.78 billion withdrawn represents 1% of total muni-bond fund assets, Mr. Reid says. Retail, or individual, investors hold an estimated two-thirds of outstanding bonds in the $2.8 trillion muni market, through individual accounts and mutual funds. The rest is held by large institutional investors.
The price volatility in the muni market was compounded by the effects of the Federal Reserve's bond-buying efforts, which have driven the yields on 30-year Treasurys higher. Rates on long-term municipal debt generally move in sync with long-term U.S. Treasurys.
Also, some individual investors have been spooked by news of the fiscal strain facing states and cities that issue the bonds, says Guy Davidson, who oversees about $30 billion in muni bonds at AllianceBernstein. The magnitude of the outflows "just speaks to how nervous people are," he says.
Retail is doing what retail always does," says Hugh McGuirk, head of T. Rowe Price's muni-bond team. "Once you get a little price movement in one direction, retail [investors] tend to chase performance or move out of the funds that are going down."...Muni-bond prices began to recover slightly late last week.
Lipper FMI, a unit of Thomson Reuters that also tracks muni-bond mutual funds, on Wednesday reported that the funds lost an estimated $2.3 billion for the week ended Nov. 24. That comes on the heels of last week's record amount of money withdrawn—$3.1 billion, the largest weekly outflow since the firm began tracking the data in 1992. It followed 19 consecutive weeks of inflows averaging $535 million. Muni-bond prices began to recover slightly late last week, stanching the outflows slightly, says Tom Roseen, a senior analyst at Lipper. "It might have lessened, but it's still huge," he says.
As the money flows out some savvy investors may already be sniffing aroiund for values. Certainly in the short end of the yield curve things may already be somewhat attractive. Looking at the short term muni etf MUB in comparison to the equivalent treasury bonds, one finds that the yield on the muni 3.70%has crept over that of the equivalent treasury bond etf (IEF) at 3.62% for the firstt time since the muni etf started trading. For an investor in the top tax bracket that would be a taxable equivalent yield of 5.72% quite a nice cushion against possible movements in interest rates in this duration. For a buy and hold investor this could be an attractive level to buy in. Even if rates go higher and there are some declines in price the total return would still likely look quite attractive relative to treasuries. In fact an article in barrons recommended buying MUB, some bond funds and certain individual bonds.Muni woes could sour appetite for bondsBy Aline van Duyn and Nicole BullockPublished: November 23 2010 19:11 | Last updated: November 23 2010 19:11A sudden change in the behaviour of investors in a corner of the US bond markets could have far wider repercussions – for everything from junk-rated debt to blue-chip corporate borrowers.For the first time in nearly two years, investors have pulled substantial sums of money out of US municipal bonds, a move that has already led to cash-strapped states, cities and other public bodies paying higher interest rates.As the main buyers of municipal debt, the move by individual investors to withdraw $3.1bn from mutual and exchange-traded funds specialising in the debt sold by local governments and municipalities around the US had an immediate impact. Yields on municipal bonds, which move inversely to prices and represent the borrowing cost for issuers, shot up.Behind the change in investor behaviour are concerns about the Federal Reserve’s huge asset-buying programme.
Yet even if the outflows stop – Lipper, the fund tracker, will release new data late on Wednesday – the fact that so many investors have pulled out of the market at the first sign of losses has potential ramifications for all debt markets.The behaviour of individual investors, in particular, matters. The amount of money they have poured into bonds – from top-rated blue-chip corporate debt to riskier junk bonds – has been at all-time highs.Any herd behaviour by those investors could therefore determine how quickly markets sell off when prices start to fall.“The recent moves in municipal yields could be a potential harbinger of things to come in other bond markets,” says Greg Peters, global head of fixed income and economic research at Morgan Stanley.“Retail got out very quickly, and because retail investors have put so much money in all types of bonds in the past 18 months, these markets are more sensitive to retail behaviour than ever before.Retail investors, wealthy savers who put money in mutual funds, have invested nearly $670bn in bond funds since the start of 2008, Morgan Stanley says. At the same time, just over $290bn has been taken out of equity funds as investors have lost their appetite for the volatility of equity investments and, in some cases, lost faith in the earning power of stocks after a decade of losses.The fact that most of the bonds are held via mutual funds makes them more sensitive to price moves, even though part of their appeal to investors is the relative “safety” of bonds. If investors own bonds directly, then they are paid interest and only lose money if the issuer defaults. But the value of shares in a mutual fund depends on the prices of bonds. If prices of the bonds owned by the fund fall – or bond yields rise – then the value of the fund falls too.“It [municipal outflows] was like any negative feedback loop: the selling causes a negative trail where mutual funds have to sell bonds, which causes loss, which causes more selling,” says Tom Metzold, a portfolio manager at Eaton Vance, which has about 16 per cent of its assets in municipal bonds.Marilyn Cohen, the founder of Envision Capital Management, which manages fixed income portfolios for individuals, says many investors had made gains on municipal bonds and were not used to seeing their online accounts down.“A lot of these are first-time investors who capitulated in the stock market. At the first sign of bad news, many said they were getting out,” she says.
Bears are rubbing their paws. Mr Fabian has seen an uptick in inquiries from hedge funds looking to profit from a muni crash. They hope the widely held view that muni defaults are unlikely will be proved as big a misconception as the notion that house prices never fall. Rick Bookstaber, an adviser to the Securities and Exchange Commission on risk, sees uncomfortable parallels between munis and mortgage-backed markets, including opacity, over-reliance on ratings and leverage (since amassing future obligations to public employees to pay them less today is a form of borrowing). Thousands of state and local entities should pray the comparison ends there.
Many, if not the majority of investors are not aware of the concept of bond duration which is used by professionals instead of maturity as a measure of risk of a bond or bond fund/etf. Simply stated duration measures the change in price for a 1% change in interest rates: a one year bond will decline 1% for a 1% decline in interest rates for a 10 year duration the change in price would be 10%. Morningstar or the fund/etf provider will have the duration on their websitte for a fund/etf. So looking at this chart it is pretty clear that further appreciation of long term bonds(falls in yields) is unlikely.November 22, 2010Top of FormBottom of FormBonds have been on a roll, with double-digit returns posted by several fixed income categories this year. Such a winning streak may tempt you to think you've got a free lunch: return with no risk.That's hardly the case.Vanguard believes bonds and bond funds can play a valuable role in nearly any investor's portfolio. At the same time, we also believe it's important to have a balanced perspective and keep your eyes open to risks.Chief Investment Officer Gus Sauter spoke with Vanguard.com about his outlook for the bond market and why you should have tempered expectations.What's your main concern right now?I'm increasingly worried that people aren't aware of the risks in the bond market. We have very low interest rate levels. But at some point, the economy will strengthen and those interest rates will rebound. Investors who have pushed out further on the yield curve by investing in longer-term bonds will then see a greater decline in the principal value of their investments.When you're seeking yield by moving into longer-term bonds, you're exposing yourself to greater fluctuations in principal. Those fluctuations are likely to be negative at some point in the future, and they'll be negative by a greater magnitude for longer-term bonds than for shorter-term bonds.
The yield for the 30-year U.S. Treasury bond generally has declined since the early 1980s. Note that there is no data for yield for 2003, 2004, and 2005 because the U.S. Treasury had suspended issuing 30-year bonds during those years. Source: Federal Reserve Board.
That certainly doesn't mean you should avoid a sensible allocation to bonds; it just means you need to be aware of the risks,,,.….The problem is that when you're at historically low rates, as we are now, you're not likely to get much more principal appreciation. In other words, yields aren't likely to go significantly lower, and at some point when the economy does strengthen, they're likely to push higher. When that happens, you'll actually have principal depreciation that will at least partially, and perhaps entirely, offset some of your yield. And we know that the yield component itself is less than it has been over the last 30 years….
When interest rates do start to push higher, the big question is how fast they'll move up. If rates move sharply, we could experience a year or more where investors receive a meaningfully negative total return from bonds. That's certainly happened in the past. And it's very possible, if not probable, at some point in the future.
Muni Tumult Ends Fund-Inflow StreakBy JOHN KELL And MATT JARZEMSKYThe muni-market tumult upended a roughly three-month run of buying in long-term U.S. mutual funds.Investors pulled an estimated $5 billion from long-term funds, the first week of net outflows, or selling, since late August, according to the Investment Company Institute.
The race for the exits was seen particularly in municipal-bond funds. Muni-bond values have slumped this month on a confluence of events, from surging Treasury yields to large new supply to the midterm election.....A net $4.33 billion flowed out of bond funds in the week ended Nov. 17 after $3.96 billion was added the previous week, ICI said. Taxable funds had inflows of $457 million while municipal ones saw $4.78 billion in withdrawals.
BAB Program Likely to Get Another Year
The Build American Bonds program, which provides federal subsidies for taxable bonds issued by state and local governments, is likely to survive another year, top Senate Republicans indicated.
The program is set to end on Dec. 31, and its possible expiration was one reason cited for the recent selloff in the municipal-bond market.
......Uncertainty about the program's fate helped lead to a glut in issuance that played a large part in roiling the muni-bond market over the past two weeks. A sharp selloff stabilized late last week, and muni-bond prices in the past few days have climbed slightly as issuance slowed ahead of the Thanksgiving holiday.