| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Rising interest rates threaten value of bond holdings |
USA TODAY - May 14, 2010 - by John Waggoner
We had another taste of a bear market in stocks last week, but it's probably time to worry about a bear market in bonds. Normal bond bears are like trips to the dentist: not much fun, but probably good for you.
What Wall Street is worried about is whether this is a mega-bear market in bonds, which is more like a trip to the cardiac unit on a stretcher carried by clowns. Those fears probably aren't justified. Still, it's a good time to take a few precautions with your bond holdings.
Why worry about bonds? From a contrarian point of view, bonds have become so popular that they're due for a shellacking. Investors put a net $376 billion into bond mutual funds last year, a record-shattering figure. In contrast, the record inflow to stock funds was $309 billion, in 2000.
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Investors are still showing the love this year. They have poured an estimated $112 billion into bond funds through May 5, says the Investment Company Institute, the funds' trade group.
You normally see such enormous flows into funds at the top of a market, not at the bottom.
So what could go wrong? The most likely culprit is rising interest rates. This bears some explanation.
Bonds are long-term, interest-bearing IOUs, issued by the federal government, state and local entities, and corporations. Consider one of the most popular bonds on the planet, the 10-year Treasury note. The most recently issued 10-year T-note matures on March 15, 2020. It pays 3.5% a year in interest, paid semiannually.
If you had bought a $1,000 T-note, you could expect to get $35 in interest every 12 months for the rest of the decade, at which point you'd get your $1,000 back. And as long as you held your bond to maturity, you'd be very sure of getting timely payments of interest and principal.
But let's say that you wanted to sell your $1,000 T-note a year later. There's a wrinkle: Newly issued T-notes now yield 5%. Bond traders would point and laugh at your T-note, which yields just 3.5%.
You can't change your bond's interest rate, called the coupon rate. But if you were desperate to sell your bond, you could sell it for less than face value, which would increase its yield — interest payment divided by principal.
As a crude example, suppose you cut your bond's price to $700. The bond's yield would rise to 5%, and you'd take a 30% haircut on your principal. (Bond traders use a far more precise measurement, called yield to maturity, but you get the idea.) If rates fell, of course, you'd be able to sell your bond for a profit.
Last year, the 10-year T-note yield rose from 2.24% to 3.84%. Funds that invest in U.S. Treasury securities fell 9%, including reinvested interest, according to Lipper, which tracks the funds.
Interest rates are still unusually low, and could rise more, says Tad Rivelle, chief investment officer for fixed income at the Trust Co. of the West. The yield on the 10-year note has averaged 5.5% the past two decades. He thinks rising public debt will push rates to 5.5% to 6.6% before this cycle has ended.
That's the bad news. The good news is that the prospects of a catastrophic bear market in bonds — one that features spiraling corporate bond defaults — are probably receding. Defaults peaked in the first quarter of 2009, says John Lonski, chief economist for Moody's Investors Service. The current default rate is 9.5%, and he expects that to fall to 3% by year's end as the economy recovers and corporate profits increase.
Corporate bond funds tend to fare well when the credit cycle is on the upswing, even if rates rise. At the end of 2008, bond traders assumed that all corporations would be in bankruptcy by 2010. As credit conditions improved, bond prices rose. The average fund that invested in high-quality corporate bonds rose 14.7%.
The wild card is Europe: If debt liquidation starts abroad, we could see it spread here. Already, yields on lower-quality bonds have started to rise, reflecting traders' unease about world finances. What's a bond investor to do? A few suggestions:
•Consider individual bonds, rather than bond funds, and hold them to maturity.
•Don't buy long-term bonds, which see greater price swings than short-term bonds when rates rise.
•Stick with investment-grade bonds. Yields on high-yield, high-risk bonds aren't high enough to reward you for the risk, Rivelle says. But you can get some decent returns from big bank bonds, such as those issued by Bank of America and Citigroup.
You might also consider inflation-adjusted bonds, whose prices rise with the consumer price index, the government's main gauge of inflation. Now, 10-year Treasury Inflation Protected Securities, or TIPS, are priced for an average 2% inflation rate for the rest of the decade. If the inflation rate rises sharply, TIPS should fare well.
John Waggoner is a personal finance columnist for USA TODAY. His Investing column appears Fridays. His book,Bailout: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments, is available through John Wiley & Sons. Click here for an index of Investing columns. His e-mail is jwaggoner@usatoday.com. Twitter: www.twitter.com/johnwaggoner.
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