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WSJ: Three Tips on Bond Investing in Today's Environment

By    |   Sunday, 05 October 2014 02:58 PM

With interest rates still near record lows but investors focusing hard on the timing of Federal Reserve interest rate hikes, it's a difficult environment for investing in bonds.

The Wall Street Journal offers a few tips for playing the bond game.

  • Consider passive bond funds over actively-managed ones. Over the past five years 85 percent of high-yield bonds funds underperformed their benchmark, according to S&P Dow Jones Indices. And expenses for actively-managed funds can total 90 percent more than their passive brethren.
  • Given the likelihood of Fed rate hikes in coming years, bond investors shouldn't expect real returns of more than 1.5 to 2 percent annually during the next three years, Laurence Siegel, head of the CFA Institute Research Foundation, told The Journal.
  • Don't take excessive risk just because you're frustrated by paltry interest rates. The 10-year Treasury note's  yield totaled 2.45 percent Friday, for example. "There’s no easy answer for this low-interest-rate environment," Siegel said. "It stinks."

A strong argument can be made that long-term rates are near at least a short-term equilibrium now.

"Even with [Friday's] strong jobs report, you saw very weak wage growth, falling inflation expectations, a firmer dollar and a continuing weak global growth story that has kept a bid in Treasurys," Christopher Sullivan, chief investment officer at United Nations Federal Credit Union, told Bloomberg.

"The labor market is getting better, which means imminent changes to the Fed’s tone. But the closer we get to raising rates, the stronger the dollar will get, which will continue to put a cap on yields."

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With interest rates still near record lows but investors focusing hard on the timing of Federal Reserve interest rate hikes, it's a difficult environment for investing in bonds.
WSJ, approach, bonds, juncture
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2014-58-05
Sunday, 05 October 2014 02:58 PM
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