Bonds are no longer safe haven
Historically, bonds have been viewed as a secure investment. Bonds issued by governments of major, mature nations, such as the United States and Great Britain, are considered “risk free” from default, as they never have. Unless bonds are held to maturity, however, there is interest-rate risk. If an investor sells before maturity, a loss is possible if rates rise.
The credit ratings of the United States and Great Britain were downgraded by some agencies last year. But the prospect of rising interest rates threatens the market prices of all conventional bonds not linked to an index that adjusts returns with inflation.
Pacific Investment Management Company (PIMCO) manages assets of $2.04 trillion. According to analyst Morningstar, 90 percent of PIMCO assets are invested in bonds. The world's largest mutual fund is PIMCO's Total Return Fund, which suffered redemptions of $10 billion in June alone.
On June 28, PIMCO's founder and CEO William H. Gross, who has taken to sharing his thoughts on Twitter, said: “We like bonds here. They won't make you rich but the May/June experience is unlikely to be replicated in 2013.”
When it was suggested that interest rates might turn downward again, however, Craig J. Ferrantino, a Long Island financial adviser, sold 15 percent of his clients' PIMCO assets.
At a time of rising interest rates, the fixed yield on a conventional bond becomes progressively uncompetitive and its market price falls. In an environment of falling interest rates, bond prices rise.
To encourage continued economic growth, many governments moved their domestic interest rates downwards. Americans have enjoyed almost 30 years of flat or decreasing interest rates. This translated into perhaps the greatest-ever bull market in bonds.
The Federal Reserve in recent years has instituted a program of bond-buying called quantitative easing. A key part is buying vast amounts of Treasury bonds to drive up bond prices and move yields, or interest rates, down.
Despite the size of the program, it appears to have had questionable impact on job creation and real economic growth. Doubts about quantitative easing's efficacy were expressed by some Fed Open Market Committee members. This caused bond yields to bottom as prices peaked on April 29, 2013.
Last month, Fed Chairman Ben Bernanke said that if economic improvement continues, the central bank might scale back its $85 billion a month bond market subsidy. “We would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year,” he said.
To some, Bernanke's statement may have sounded mild. But it was enough to cause a wave of panic for some investors. Without the Fed's financial heroin, interest rates would rise sooner than expected, they feared. As a result, bonds, equities and gold fell rapidly. The bull market in bonds appeared threatened.
Whatever the future, last month's bond market panic should have alerted investors that after a 30-year bull market run, rising interest rates threaten the market price of even the highest quality bonds not held to maturity.
John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Email him at email@example.com.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Steelers’ Harrison eyes stretch run
- Steelers notebook: Tomlin ends practice with third-down work
- Penguins co-owner Lemieux snuffs rumored rift with Crosby
- Warrants issued for women accused of prostitution in New Stanton sting
- NFL notebook: Gifford had CTE, family says
- Starkey: Artie Rowell’s incredible odyssey
- Russia’s crackdown in predominantly Muslim region fuels exodus to ISIS
- Pirates sign free agent 1B-OF Goebbert, RHP Webster
- Obama signs $607B Defense bill but blasts GOP limits for Gitmo
- Pizza delivery woman robbed in Greensburg
- ‘Crisis mode’ near at U.S.-Mexico line as nearly 5,000 children try to cross border in October