Posts Tagged ‘bonds’
Conforming 30-year mortgage rates spiked higher from the mid 3% to the mid 4% range during the bond market sell-off in the second quarter. BCA Research, who provided this chart, write that the spike is probably overdone and to expect rates to slowly subside again over the next month or two.
However, unless deflation fears resurface, I believe the bond market may have finally put in its low and that mortgage rates are unlikely to decline to those historic levels again. For those who may have been procrastinating about a refinance and as a result missed their opportunity, I would not hesitate should rates dip below 4% again.
As far as bonds go, that is. Barry Ritholz suggests that it might be the case, pointing to this Barrons cover.
People, notably Bill Gross, have been expecting the extraordinary decline in interest rates to reverse itself for some time now. This particular sort of media coverage is a good indicator that investing in investment-grade fixed income (Treasuries and others) is now accepted wisdom. When that happens, it means that pretty much everyone is in the pool already. If this were a normal market, e.g. no buyers with ulterior motives such as China and the Fed, I would say it was time to start trimming these exposures in a meaningful manner.
Another nice article featuring one of our longtime, and also one of our favorite, mutual fund managers: Dan Fuss of Loomis Sayles Bond
In 1999, soon after I started this business, if you had said that bonds would outperform stocks over the coming decade, that my Conservative and Balanced portfolios, with their heavier allocations to fixed income, would outperform my more equity-focused Growth portfolios, I would have
not considered that to be a highly unlikely outcome. Yet that is exactly what occurred. And today, after more than a decade of outperformance by fixed income, and unnerving turmoil in the equity markets, bonds are now “hot” (as hot as bonds can be), and equity investments increasingly out of favor. Yet the critical question for investors seeking to build, or preserve, their savings in the coming years is whether this state of affairs will continue. As a recent article from Tradewinds Global Management put it:
In a way, today’s bond market feels like the 1999 stock market, when technology companies were all the rage… Three decades ago people hated bonds. Yields of 15 percent for 30 years were considered certificates of confiscation. Investors thought governments couldn’t be trusted, $150 billion deficits were too high and 4 or 5 percent money supply growth was too much. Therefore, they didn’t want to lock up money at 15 percent.
Obviously, that was the perfect time to lock up money. Now 30-year rates are less than 3 percent, with the 10-year U.S. Treasury yielding less than 2 percent. And oddly enough – just like the tech stocks in 1999 – people are rushing to buy them …
The risk is exceptionally high. If things go well for bond holders, the potential reward is 3 percent per year for 30 years. If things don’t go well and rates return to 15 percent, bond holders would lose more than three-quarters of their money. This is return-free risk.
This is a challenge for those who must meet retirement needs, or meet the needs of endowments, foundations and pension plans. Where can one go? Various places, including alternatives and real estate – and of course the stock market.
A colleague wrote last month, “while I am not overly attracted by what I consider a stock market that is fully valued, I held my nose and bought.” No less than Warren Buffett has advised that stocks are poised to return to outperforming bonds in the years ahead. Not without volatility of course, and investors should carefully calibrate their own needs and risk tolerances. But given the near-inevitability of mean reversion (or “anything that can’t go on forever, won’t”), the probability of bonds continuing to outperform stocks in the coming decade is small indeed.