Retiring Vanguard Bond Guru: Rising Interest Rates Don't Have To Kill Bond Holders

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Rising Rates Aren’t Necessarily Bad For Bond Investors (Vanguard)

With interest rates expected to rise, investors are worried that 2013 marked a tough patch for bonds where yields would rise and prices decline. But Robert F. Auwaerter, principal and head of Vanguard’s Fixed Income Group, thinks the market has already priced in the possibility of rising interest rates that could cause bond prices to fall. The more difficult question is “Will rates rise more than what’s been priced in?” And that, he says, is much harder to answer.

“But it’s worth remembering that rising rates are not necessarily a bad thing if you have a long time horizon and the average maturity of your bond fund is shorter than your time horizon [the time until you’ll need the money]. For example, if you’re invested in an intermediate-term bond fund and you have a longer-term time horizon, you’re going to get a better total rate of return with interest rates rising, because you’re going to be reinvesting those coupon payments and principal payments at higher rates. It becomes a problem when investors, in their search for higher yields, invest in long-duration assets but have a shorter time horizon. That’s where you potentially get hurt.”

Monetary Policy Is No Longer In Sync With Economic and Market Cycles (Goldman Sachs Asset Management)

In the U.S. and U.K. central bank policies have gotten out of sync with economic and market cycles, according to the folks at Goldman Sachs Asset Management. “We think this is particularly true in the U.S., where monetary policy appears more consistent with an economy in the early stages of recovery, while return prospects and volatility in corporate credit and other fixed income risk sectors appear more consistent with a maturing economic expansion.”

“In our view, something has to give: either monetary policy is too far behind the economic cycle and needs to catch up, or the market cycle is too far ahead of the economy and needs to correct. We believe monetary policy needs to catch up with growth, and that interest rates in the U.S and U.K. are likely to rise by a significant amount in the next one to two years. A second implication is that corporate credit, non-agency mortgages and other fixed income risk sectors may not offer the same strong returns as in recent years, but returns should still be positive.”

In The More Normal Market Ahead, Investors Will Need New Signals (Bernstein Global Wealth Management)

As the Federal Reserve begins to pare back liquidity, and with valuations in the stock markets of developed countries are at their long-term historical averages, we’re returning to a more normal market. In the more normal market, “investors will need to rely on other signals for direction,” according to the folks at Bernstein Global Wealth Management.

“Among the key indicators will be data on global economic health, and we systematically track such releases across all major economies. In a high-consensus environment, we are particularly interested in how the new data stack up against expectations: in other words, the degree of positive or negative surprise from actual versus predicted results.”

What Advisors Can Learn From Startups (

John Kador at is out with a list of seven lessons that advisors can learn from startups.

1. “Focus relentlessly on the use experience” – See what a client’s experience would be using your website or calling your office.

2. “Outsource as much as possible” – Outsource non-essential tasks like social media outreach.

3. “Organise the work environment for creativity” – “One reason startups are so innovative is that their work environments are set up to foster real creativity, not just someone’s arbitrary perception of “professionalism.”

4. “Favour transparency” – Younger clients especially value transparency and this helps organisations become “more nimble, more adaptive, and more innovative.”

5. “Adopt and test ideas quickly” – “If there’s one reason startups disrupt existing businesses, it’s that they believe the key to creativity is constant experimentation.”

6. “Surround yourself with people who challenge you” – Don’t try and be the expert that knows everything about everything, instead look for others that can challenge you.

7. “Exploit social media for all it’s worth” – “There’s no better bang for the buck than targeted social media, a reality that all startups embrace.”

A Fascinating Way To See Bubbles Within The Stock Market (Goldman Sachs)

Bubbles can be hard to spot, but Goldman Sachs’ David Kostin is out with a chart that offers an interesting way to spot bubbles. This shows a composition of different sectors of the S&P 500 by market cap since 1974. Bubbles can be seen when a sector balloons as a per cent of the S&P 500. “Financials was only the third sector since 1975 to represent 20% of the market capitalisation of the S&P 500,” writes Kostin. “However, Financials share of the S&P 500 market cap has declined from 22% to as low as 9% in early March 2009.”

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