Tags: Coumarianos | bond | funds | expense

Analyst Coumarianos: Beware the Expenses of Short-Term Bond Funds

By    |   Friday, 29 May 2015 10:00 AM

Some investment experts recommend short-term bond funds as a tool for fixed-income investors to avoid the bond market's carnage when the Federal Reserve finally raises interest rates.

But former Morningstar analyst John Coumarianos offers a note of caution.

"What observers haven't noticed as much is how high expenses are on actively managed short-term bond funds, relative to the paltry return they're poised to deliver," he writes in an article for MarketWatch.

"Not long ago, investors with liquidity needs two or three years away could hold a short-term bond fund in lieu of cash, and expect to match inflation after fees."

But that's not likely to continue "for the foreseeable future, given low available yields relative to their fees," Coumarianos argues.

"It will be extremely difficult for short-term bond funds to generate a 2 percent annual return for the next few years, and longer if rates don't move up in the future."

The Federal Reserve has an inflation target of 2 percent and is expected to begin raising rates in September or December. Two-year Treasurys yield only 0.63 percent.

Bonds have traded in a very volatile manner this month, with the 10-year Treasury yield rising as high as 2.34 percent and falling as low as 2.06 percent.

This rollercoaster ride is likely to continue, says New York Times columnist Neil Irwin. And why is that, you ask? "There is less liquidity than there once was," he writes.

Increased bank regulation since the 2008 financial crisis has led U.S. banks to curtail their participation in bond markets.

Meanwhile, central banks are a much bigger holders of bonds than in the past, thanks to quantitative easing. But the central banks don't trade frequently, another factor keeping liquidity down.

As for the fundamentals, it's difficult to see anything that will push bond yields much higher soon. The economy is sputtering, with growth totaling only 0.2 percent in the first quarter and the Atlanta Federal Reserve's forecasting model putting second-quarter growth at just 0.8 percent.

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Some investment experts recommend short-term bond funds as a tool for fixed-income investors to avoid the bond market's carnage when the Federal Reserve finally raises interest rates.
Coumarianos, bond, funds, expense
332
2015-00-29
Friday, 29 May 2015 10:00 AM
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