Friday, August 27, 2010

Where Next for Bonds?

Tony Crescenzi of PIMCO and Jeremy Siegel of the University of Pennsylvania and the dividend-oriented WisdomTree ETFs discuss the outlook for bonds.

The above graph provides investors some perspective on long-term trends in bond yields.  The last time rates were as low as today was the mid 1950s, after which it could be argued a thirty year bear market in bonds ensued only to the broken by Paul Volker in the early 1980's.  From this inflection point a thirty year bull market in bonds followed culminating in today's historic low rates.  For investors, the rear view mirror means nothing, only what is going to happen in the next 1 - 5 years.  The question is when are these historically low interest rates going to move higher?  No one knows precisely.  But my crystal ball says as long as the expectations for growth remain weak (i.e. below 1.9%), and the fear of higher taxes and deficits weighs on investors' minds rates will remain low.  The Fed can only do so much to manipulate rates downward.  If the markets think growth is picking up and the market begins to fear Washington less, I expect the upward move start on the long-end of the scale and follow through across the yield spectrum.  I expect this move to start taking place in early 2011 after the impact of the mid-term elections becomes apparent to investors.

Where am I putting the fixed income portion of my investments there days?  Hint: not in funds heavy in Treasuries.

Mutual Funds
Dodge and Cox Income (DODIX)
Harbor Bond Fund (HABDX)
Templeton Global Income (GIM)
Templeton Emerging Markets Income (TEI)
T. Rowe Price Tax-Free Income (PRTAX)
Vanguard Short-Term Investment-Grade (VFSTX)
Vanguard Intermediate-Term Investment-Grade (VFICX)


JPMorgan USD Emerging Markets Bond Fund (EMB)
SPDR Barclays Capital High Yield Bond (JNK)
Vanguard Short-Term Corporate Bond (VCSH)
Vanguard Intermediate-Term Corporate Bond (VCIT)
iShares S&P U.S. Preferred Stock Index Fund (PFF)

Those interested in hedging the treasury exposure in their portfolio should take a look at something like ProShares UltraShort 20+ Year Treasury (TBT).

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