Interest rates are at historical lows in the US and in many other countries.
As the world's economies begin to come out recession, those rates will eventually
begin to rise. Some countries have begun, and others are planning when and
how much.
Two important risks for bonds are credit risk and interest rates risk. The
crash of 2008 raised the perceived level of credit risk, which briefly depressed
credit bonds and inflated US Treasuries, which are perceived to be the lowest
credit risk. Much of the perceived credit risk has dissipated and bond prices
have at least substantially recovered in most cases. However, because of the
historically low interest rates, there is now more rate increase risk than
opportunity (bonds tend to fall when rates rise and to rise when rates fall).
It is probably time to think about shortening the duration of portfolio bond
holdings to reduce exposure to interest rate risk, and/or to reallocate some
portion of bond holdings (fixed income) to above average equity yield positions
(income growth). The capital gains in bonds over the past year are not likely
to be repeated in the near term, while some degree of reduced total return
and possible capital loss in some bonds are fairly likely as interest rates
rise.
Disclaimer: Opinions expressed in this material and our disclosed positions
are as of July 5, 2010. Our opinions and positions may change as subsequent
conditions vary. We are a fee-only investment advisor, and are compensated
only by our clients. We do not sell securities, and do not receive any form
of revenue or incentive from any source other than directly from clients. We
are not affiliated with any securities dealer, any fund, any fund sponsor or
any company issuer of any security. All of our published material is for informational
purposes only, and is not personal investment advice to any specific person
for any particular purpose. We utilize information sources that we believe
to be reliable, but do not warrant the accuracy of those sources or our analysis.
Past performance is no guarantee of future performance, and there is no guarantee
that any forecast will come to pass. Do not rely solely on this material when
making an investment decision. Other factors may be important too. Investment
involves risks of loss of capital. Consider seeking professional advice before
implementing your portfolio ideas.
IMPORTANT NOTE: We are a Registered Investment Advisor. We do not sell
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interpreted as specific advice for any specific person or situation. In our
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do not warrant the accuracy of those sources or our analysis. Research, data
and opinions expressed on this site are for information purposes only, are
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