This is a follow-up to last week's letter suggesting that the best days for
bonds are behind us for a while, and that reduction of bond positions is in
order. We have been replacing bonds in managed accounts with high quality,
above average dividend stocks with long histories of paying and growing dividends,
and shortening duration among the substantially reduced bond positions we hold.
Rates have begun to rise, which means bond price have begun to decline. This
daily chart of Treasury rates for 3-mo, 2-yr, 10-yr and 20-yr:
Inflation Protected Treasury bond investors expect the CPI for the next 10
years to be approximately 2%, as this Federal Reserve chart shows:
The historic opportunity for capturing a shrinking yield spread between higher
and lower quality debt has mostly passed, as this Federal Reserve chart of
the spread between AAA rated corporate bonds and BAA rated corporate bonds
shows:
Here are weekly 1-year charts of percentage total return performance for several
important bond groupings. In each case, they are compared to US aggregate bonds
(BND):
Aggregate Bonds By Duration (BSV short-term, BIV intermediate-term, BLV long-term):
Bonds By Type (IEF intermediate Treasuries, MUB intermediate municipal bonds,
LQD intermediate inv grade corporates)
Treasuries By Duration (SHY 1-3 yr Treas, IEF 7-10 yr Treas, TLT 20+ yr Treas):
US versus Foreign Sovereign Debt (IEF US Treas, BWX Inv Grade Local Currency
Developed Market Sovereigns, EMB Inv Grad USD Denominated Emerging Mkt Sovereigns):
Interest rates are beginning to rise, and have more room to rise than to fall.
Bonds have gone from low risk to medium and high risk assets, as a result of
what may be the bottom of the multi-decade decline in interest rates. We recommend
substantially reducing bond exposures.
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
investments or control client assets. We are professional advisors compensated
on an hourly basis or flat fee basis for portfolio management or for our coaching
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interpreted as specific advice for any specific person or situation. In our
research, we utilize information sources that we believe are reliable, but
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
general in character and are not advice specific to any individual investor.
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