The Bond Debacle


Roughly two months have passed since the election, and things appear to have calmed down. The chance for an overturn of the voting results looks very minimal with the inauguration of President Elect Trump around the corner. Agree with him or not, the stock market has made a move higher, as assumed economic growth policies are igniting hope in the hearts of investors. Whether these “policies” become real is yet to be determined; but, truth and time tell all. In my previous article, I referenced that the last time Republicans controlled Congress, the Senate, and the Oval Office was in 1928. Back then, the market shot higher for roughly a year before entering the Great Depression. I do not believe that history always repeats itself, but it does tend to rhyme.

I wanted to bring to the attention of MCM readers the shift in sentiment regarding bond investing since the election. A portfolio may be constructed with some mixture of bonds and bond funds, and stock or stock funds designed around an investors risk tolerance. Historically, stock funds involve more risk than bond funds and the more stock you have in your portfolio, the more potential for volatility and loss you may see. Many of my clients will quote the old “Rule of Thumb” – your portfolio should hold the same percentage of bonds as your age. So, if an investor is 50 years old, the “rule” would designate 50% in bonds.

Over the past 30 years, investing in bond funds may have been considered a relatively conservative way to earn a good rate of return. When interest rates go down, the prices of current bonds go up. In the early 1980s, interest rates peaked in the very high teens – people could find CDs paying 16%! That was the peak of that interest rate cycle, which started in the 1960s when you could find a mortgage for around 4%. History shows that in a rising interest rate environment, bond fund investors have a more difficult time earning a positive return rate. Our historically conservative way of earning a positive rate of return through bonds may be changing right before our eyes.

Since the election, the stock market has done incredibly well, but not the bond market. In fact, per, the ten-year treasury bond market index, as measured by the fund IEF, traded from $110.40/share the night before the election down to, as of this writing, $104.36. That means that if you owned this bond fund since the election, you have lost roughly 5.47% of your principle.

In my opinion, there is a good chance that our interest rate cycle that started in the 1980s with extremely high yields is now over, and we may be entering an increasing interest rate environment. With that said, you may want to visit with your financial advisor to make sure that you are positioned correctly per your risk tolerance, goals and objectives. Bonds should continue to be a prudent investment into the future; but if we are now in an increasing rate environment, you may be looking at conservatively and slowly losing your principle.




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