Sometimes people forget that you can lose money in bonds, and we have recently experienced just that. The stock market is known for its volatility and the bond market for being, well, “safe” and not volatile.
Two years ago I began warning you about my expectation that the bond fund returns we have been experiencing would not be as high as the past few years and that has now occurred, with negative numbers the last few months.
FINRA “…is sounding alarms about the possibility of a plunging bond values as the economy recovers and interest rates rise.” (Reuters, “Preparing Clients for looming bond risk” June 3, 2013)WHY? A number of things may be causing this. In as non-technical terms as I can muster…
The economy is doing much better, so people are moving their money into stocks, which reduces the demand for bonds. Lowered demand = reduced value.
The government has been shoring up the economy by buying bonds since November 2008 (“Quantative Easing”). Their goal has been to keep the country out of a deeper recession. It also kept the demand for bonds higher. The Fed has now made a lot of noise about “tapering” off that program.
An improving economy, combined with the “tapering” off quantative easing is generally expected to cause a rise in interest rates. This reduces the value of the bonds currently held in bond funds.
WHAT ELSE COULD HAPPEN? Well, there are a lot of people that believe we are due for a market pullback. Here are some recent quotes:
From USA Today – “The Standard & Poor’s 500 Index is up a rarefied 140 percent since the low of March 9, 2009, high enough for many investors to feel among the clouds. That begs the question of when the next big correction will occur.(1)”
My crystal ball is broken, and I cannot find a certified repairman…
From Graham Summers in Market Oracle – A short-term market correction would not have a lot of effect on the bond market. However, a longer-term drop in the market might actually help the Bond Markets. Some are forecasting such a drop:
“Investors take note… now is the time to be prepping for a market correction. As Friday’s action showed, when it comes, it’s going to be fast and violent.(2)”
SO WHATS YOUR PLAN? I agree with the prevailing opinion to pull back into “short-duration” bond funds. Depending on your risk profile, it may be appropriate to add some stock holdings into the mix.
Please give me a call to discuss this.
1- USA Today, May 17, 2013, John Morgan “Wall Street Awaits a Stock Market Correction”
2- Market Oracle, June 3, 2013, Graham Summers, “Fridays Stock Market Drop was just a hint of whats coming”
3- Reuters, June 3, 2013, Suzanne Barlyn, “Preparing clients for looming bond risk”