“Tis better to have loved and lost
Than never to have loved at all”
– In Memoriam A.H.H., Lord Alfred Tennyson
I’m writing today of unrequited love. No, I’m not going all soft on you and trading a financial markets career for one writing Harlequin love stories. I’m talking about the love many investors are inexplicably giving an asset class that doesn’t deserve it.
Treasury bonds. Mortgage bonds. Long-term corporate bonds. Junk bonds.
Despite the worst yields in history … the biggest price risk ever … and the losses they are starting to dish out, many investors are still enamored by these pieces of potentially very risky paper.
But I believe that investors who continue to love bonds the way they have been will definitely lose money, potentially a lot of it. So I’d rather they do the opposite of what Tennyson suggested, and just never love them at all.
Investors not yet ready to part aggressively with
all their bonds — despite pathetic returns
Opinions are one thing. But actual money flows are another. And the statistics show that many investors just aren’t yet ready to part with all of their bonds.
Consider the following details from a Bloomberg story titled “Bond love endures for investors unconvinced rally’s over”:
|“I feel sorry for people that have clung to fixed-dollar investments.” —Warren Buffett|
- Bill Gross at Pimco is the biggest fixed income manager in the world. He just warned the three-decade bond bull market was likely over. Another lengendary bond manager, Jeffrey Gundlach at DoubleLine Capital LP, thinks bonds are “terrible.” Warren Buffett believes bonds are such a lousy investment that he “feels sorry” for people owning them.
- Yet investors have continued to pour so much money into bond funds that their assets have exploded! In the six years through the first quarter, bond fund assets more than doubled to $3.5 trillion. Stock fund assets rose just 6.5 percent to $6.5 trillion during that time.
- This year? Bond fund inflows have totaled $86.3 billion, outpacing the $71 billion in stock fund inflows. That’s despite one of the strongest stock market runs in a long time, and a bond market that’s going nowhere fast.
What do I mean? Well, take a look at this chart of the iShares Core Total US Bond Market ETF (AGG). The $15.6 billion ETF is designed to track the entire bond market, with 37 percent of its money in Treasuries, 28 percent in mortgage backed securities, and the rest in a mixture of corporate bonds, agency bonds, and so on.
You can see that it has basically made no progress at all since August 2011. In fact, anyone who bought at virtually any time in the last year has lost money on pure price movement. And because of the paltry interest rates available, they’ve picked up very little in yield — especially when you factor in inflation.
My Advice? Get Ahead of the Pack and Sell
So why oh why does this love affair continue?
Some of it is inertia. People just don’t want to sell what worked for them in 2009, 2010, and early 2011 … even if it isn’t working any more.
Some of it is fear. Investors were burned so badly by the 2008 stock market crash, when Treasury bonds were about the only asset class that went up in value, that they’re willing to buy bonds at almost any price.
And some of it is the fault of central bankers worldwide. They’re essentially cornering the bond market, making the Hunt Brothers’ infamous cornering of the silver market in the late 1970s and early 1980s look like child’s play.
Many investors assume that as long as central banks are buying, they have a “can’t lose” investment in bonds. Then again, that’s what people thought about silver when the Hunts were buying … right before the price collapsed from almost $50 an ounce to $10 in a matter of weeks.
My advice is clear, consistent, and straightforward: Sell now, before the rest of the pack tries to! You’re taking on too much risk for too little return in many corners of the bond market. That means the risk of major losses is massive.
Not sure how much risk you have? Then start by “scrubbing” your bond portfolio —following the steps I outline here.
Then take those funds and reallocate into the many “bond alternatives” I have been recommending, and which have been performing very well. I believe they offer much better potential returns, with less risk, Tennyson’s advice be darned.
Until next time,