Indications to Maintain Bonds in a Portfolio

People are afraid of bonds and rising interest rates, never mind that the types of bonds in a portfolio can be adjusted to accommodate almost any sort of interest rate environment.  But in investing, it’s not the snake you see that bites you but the one you don’t see.  The two articles below indicate more potential signs that the time to buy bonds is near if not now, or at least suggest one should not abandon the role of bonds in a portfolio.


Bond Mutual Funds Headed for Record Withdrawals This Year


Investors have removed $70.7 billion so far this year from bond funds, TrimTabs Investment Research said today in an e-mailed statement. Unless the trend reverses, the redemptions would surpass a record $62.5 billion that investors removed from bond mutual funds in 1994, according to TrimTabs.

Note the comparison to 1994, which proved to be an excellent time to BUY bonds since everyone was scared about rising interest rates.  Recall that the Fed was raising the Fed Funds Rates that year in response to an improving economy following the recession of 1990-91.  FWIW, the Barclay’s U.S. Aggregate Bond Index returned 11.43% in the year following its trough on May 9, 1994 according to data from Morningstar.


Performance of Stocks vs Bonds


With the S&P 500 up 23.4% and long-term US Treasuries down 10.2% over the last 200-trading days, the current performance spread between the two asset classes is above 30 percentage points.  In what has become a comparison that is increasingly looking as lopsided as matches between the Harlem Globetrotters and the Washington Generals, when people compare the two asset classes, there are very few who would pick Treasuries to win.

… While it is common for equities to outperform treasuries, the current level of outperformance is relatively uncommon. … At some point you would expect the two to revert back to their long-term historical average.

The timing of when mean reversion occurs is difficult at best.  But there is a saying for those who are not prepared for its eventuality:  “Mean reversion is a bitch!”


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