Taking a Cue From Bernanke a Little Too Far
Financial advisers have been fielding calls from1
shaken investors in recent weeks, particularly retirees, who are
nervous that a bond market crash is on the horizon.
You can hardly blame them. Investors have been4
fleeing bonds in droves; a record $ 76.5 billion poured out of
bond funds and exchange-traded funds since June. That
exceeds the previous record, according to TrimTabs, when7
$ 41.8 billion streamed out of the funds in October 2008 and
the financial crisis was in full force.
But the rush for the exits really means one thing:10
investors are betting that interest rates are about to begin their
upward trajectory, something that’s been expected for several
years now.13
Their cue came from the Federal Reserve chairman,
Ben Bernanke, who recently suggested that the economic
recovery might allow the central bank to ease its efforts to16
stimulate the economy. That includes scaling back its bond-
buying program beginning later this year.
So the big fear is that interest rates are poised to rise19
much further, driving down bond prices; the two move in
opposite directions.
A Barclays index tracking a broad swath of22
investment-grade bonds lost 3.77 percent from the beginning
of May through Thursday, according to Morningstar. United
States government notes with maturities of 10 years or longer,25
however, lost an average of 10.8 percent over the same period.
Making a bet on interest rates is no different from
trying to predict the next big drop in stocks, or jumping into28
the market when it appears to be poised to surge higher. These
sort of emotional moves are exactly why research shows that
investors’ returns tend to trail the broader market.31
And it’s also why many financial advisers suggest
ignoring the noise, as long as you have a smart assortment of
bond funds that will provide stability when stocks inevitably34
tumble once again.
“It’s a futile game to base portfolio moves on interest
rate guesses,” said Milo Benningfield, a financial adviser in37
San Francisco. “We don’t have to look any further than highly
regarded Pimco manager Bill Gross, whose horrible interest
rate bet against Treasuries in 2011 landed him in the bottom 1540
percent of fund managers in his category that year. Investors
should take a strategic approach designed around the reason
they hold bonds — and then sit tight whenever hedge funds43
and other institutions shake the ground around them.”
The main reason longer-term investors hold bonds, of
course, is to provide a steadying force. And though today’s46
lower yields provide less of a cushion — the 10-year Treasury
is yielding about 2.5 percent — bonds still remain the best, if
imperfect, foil to stocks.49
“The role of bonds in a portfolio has always been to
be a ballast or a diversifier to equity risk,” said Francis
Kinniry, a principal in the Vanguard Investment Strategy52
Group. “And that is very true today. Yields are low, but this is
what a bear market in bonds looks like.”
Internet: <www.nytimes.com> (adapted).