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Investment News: Watch Out, the Bond Market Is Falling

By    |   Friday, 07 June 2013 08:06 AM

Investors got a sobering glimpse in May of what's in store for the bond market — and it may be time to batten down the hatches, according to Investment News.

Interest rates leaped 50 basis points and nearly every bond fund category followed by Morningstar lost money in May because of fears the Federal Reserve may soon begin to taper down its quantitative easing program.

The result is that advisers such as David Diesslin, CEO of Diesslin & Associates Inc., are re-examining their bond strategies.

Editor's Note:
 
The Truth About the Economy — Government Documents Lead to Eerie Conclusion

"We can't eliminate bonds, but we want to minimize the negative implications of rising rates," he told Investment News.

Diesslin said he is examining a more flexible approach, including bonds that invest in multiple geographies, conservative dividend stocks and direct real estate investment.

For advisers such as Kathleen Gaffney, portfolio manager of the Eaton Vance Bond Fund, having a broader investment strategy is highly welcome at this point. Her fund has a 15 percent allocation to dividend-paying stocks and a 15 percent allocation to equity-sensitive convertible bonds.

"Investors don't want to see negative returns coming from their fixed-income allocations, so having flexibility is an important tool for a rising rate environment," Gaffney told Investment News.

Bond funds that offer protection from rising interest rates generally were a disappointment in May, Investment News reported. And both nontraditional bond funds and global bond funds lost money during the month.

But not everyone is pessimistic about a longer time horizon.

"We've talked to our clients about how losses on paper will be inevitable," said Derek Tharp, a financial adviser at Mote Wealth Management. "As long as we're holding on to them for the long term, it won't result in an actual loss," he predicted.

"It's not as scary as the bottom falling out of the [stock] market," Tharp added.

Even if "bond market vigilantes" have been pushing Treasury bond prices lower and yields higher in recent weeks, doom and gloom is not inevitable for investors, The Fiscal Times reported.

"It may only mark the beginning of a new kind of market environment — one that most of us should have been preparing for already," The Times said.

There is no guarantee that the current boost in yields is the end of the bull market for Treasury securities, the Times reported.

Recent research from Birinyi Associates showed since stocks bottomed in March 2009, there have been five other times when the 10-year bond's yield has climbed a similar amount or even more, but none of those times proved lasting, according to The Times.

Editor's Note: The Truth About the Economy — Government Documents Lead to Eerie Conclusion

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Investors got a sobering glimpse in May of what's in store for the bond market — and it may be time to batten down the hatches, according to Investment News.
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2013-06-07
Friday, 07 June 2013 08:06 AM
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