Historically, investors that want a safe rate of return look to the bond market. But with rates at cyclical lows, how safe is that rate of return?
Since interest rates peaked in the early 1980’s, bonds have been in a bull market and interest rates have declined.
Now that rates are as low as they were 60 years ago, what direction are interest rates likely to go next? Higher or even lower?
Our research indicates that when you put all of the data and information together – the massive amount of Federal Debt, the debasing of the US Dollar and higher inflation – higher interest rates seem obvious.
But we are not just expecting a short term pop in interest rates. The chart above shows that the last bear market in bonds lasted over 30 years. (Rates going up is a bear market in bonds.) We would not be surprised if bonds repeated that fate.
So what about other bonds, not just the US Treasury bond. Unfortunately, all bonds trade together. There is a high correlation among various bonds. No, they don’t all trade in lock-step with each other, but if rates are rising for the Treasury, they will be rising for Corporates and Muni’s.
Investors looking for income are especially at risk because bonds have traditionally been the first place to go for income. The next page gives a snapshot of bond yields at various durations. If interest rates double form here, (which at 4.50% doesn’t seem difficult) investors could see the price of their bonds cut in half on the secondary market and their monthly investment statements.
While it is true that most bonds, if held to maturity, will mature at full face value, My experience has been that investors are not happy when they see the prices of their bonds decline due to higher rates, nor are they happy to receive 4.50% on their money when rates are 7%, 8%, 9%…
And investors that want absolute security are in even worse shape. 3 month Treasuries yield about 0%. If a retiree wanted to put his money into the safety and security of bank Cds, he would have to deposit $100 million to receive an annual income of $50,000 at a .05% CD rate.
This means investors have to accept the risks and volatility of other investments if they want a higher rate of return than the minuscule rates offered by T-Bills and CDs. This means investors can’t get worried about the monthly ups and downs of their investment portfolio. If the monthly gyrations bother you, look at the measly returns on the next page and learn to love volatility. Our strategy is to manage that volatility, but we do not eliminate it.
Entire Report HERE
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