Long Term Treasury Yields have risen from 1.63% on May 2 to 2.74% on July 5.  Rising interest rates are always bad for bond-holders, and this time period was no exception.  Bond Mutual Funds have shown negative numbers (you noticed that in your monthly statement, didn’t you?) of recent.

Most of our clients have elected to move into “low-duration” bond funds, which are funds of bonds that have less interest-rate sensitivity.  But “Less” is not “None” and there is most certainly more pain coming in this arena.   According to an article on the NY Federal Reserve Site, they identified 31 sell-offs in the bond market since 1961 (a little more than 51 years).  Some were very short (16 days the shortest) and one lasted from April 1967-November 1970.  Our recent sell-off compares well to the sell off of 1994 and 2003, although much steeper (meaning it happened quicker).

In Bill Gross’ article this month, entitled ” Bond Wars,” he tells the story of the Battle of the Somme, the most likely the bloodiest one-sided battle in history.  And, lets face it, he is a bond genius (PIMCO Total Return) – and his point is about failing to adapt.  He urges adapting to changing times, and makes a case that his firm PIMCO is “going to win this war!”

Following his analogy is a very involved and technical description of how complicated the process is – and a good example of why choosing the right managers is so important, and what I focus on.  But lets keep this in its proper perspective:

This was only the 13th worst sell-off in the last 50 years.  It is important to remember that it is not over – there is clearly more to come as interest rates rise, and as Quantitative Easing is “tapered off…”  And it could well be a much long lasting pain…