SMI Visitor's Blog       

Welcome to the SMI Visitor's Blog where you'll find selected excerpts from our Member's Blog, plus occasional posts created especially for our visitors.

For SMI Web Members, click here to go to the SMI Member Blog.

« Blog Home

More fuel for the bond "bad news" bonfire?

The primary purpose of having bonds in your portfolio is stability. Price appreciation comes on the stock side. Bond holdings, in contrast, decrease portfolio volatility. "Bond ballast" helps keep you from abandoning the markets in fear during times of maximum market stress.

This isn't the only way to approach investing, of course, but it's how we approach it at SMI. In our strategies, we don't reduce our bond holdings simply because some people think bond prices are vulnerable. They may be, but even in such circumstances, bond portfolios — if properly positioned — are still going to be less "risky" than stock holdings in terms of their vulnerability to big losses. So don't throw your ballast away just because it looks less stable than it did a year ago. It's still going to help keep your emotional boat from tipping over in a crisis.

So, just to be clear, we're not encouraging anyone to reduce his or her bond holdings as a result of the information presented below. Our approach is to deal with an increase in bond risk by shifting toward the short-end of the yield curve, not by reducing bond holdings (if indeed, bonds are present part of your long-term plan).

On to current events. The chart below shows the yield of the 30-year Treasury bond over the past 24 years (this chart was published recently in the Los Angeles Times). It shows the fairly steep rise in yield from a panic low of 2.5% in January 2009 to the recent 4.70% yield.

As you can see, there have been plenty of ups and downs over the past two decades, but the steady trend has been toward lower yields. As this month's SMI cover article points out (The Bond Basics You Need to Know in 2011), lower yields mean higher bond prices. In other words, we've had a huge bull market in bonds as a result of these falling yields.

But, as the chart vividly shows, that downward trend line has been in jeopardy lately. In fact, the 30-year Treasury bond ended last Friday with a yield of 4.732%, effectively crossing that long-term trend line for the first time in many years. These "technical" trends aren't gospel, but there's no way to paint this as anything other than a potentially ominous sign. (See my October 2009 article, Re-Evaluating the "Safe" Part of Your Portfolio.)

That said, the end of a falling trend in interest rates is not necessarily the same thing as a new rising trend. Bond guru Bill Gross of PIMCO, while warning many times over the past year that the end of the bond bull market is near, has also said that he doesn't anticipate Treasury yields to rise rapidly (he expects a gradual rise).

Time will tell.

Powered by Movable Type  |   Subscribe  |   Email Updates