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Bonds Lost, Now What?

Written by Ethan S. Braid, CFA on July 16, 2013 

Bonds Lost, Now What?

 

Recently I went on a fly fishing trip to a wonderful lodge & trout stream in Wyoming.  One night after dinner my fishing partner, his son and myself were sitting on the deck of the lodge discussing the issues of the day with some of the other guests.  One of those guests happened to be a financial advisor.  Tired from a long day in the sun, I turned in early just as the conversation shifted to investments.  The next morning, my buddy says to me, “you should have stuck around for the conversation last night!”  Intrigued, I asked, “why?”  “Well, according to the financial advisor who was holding court last night, he invests his clients’ money in bonds because bonds never lose money.”  “Come again?” I said in total disbelief.  “Yep, that’s right, the financial advisor said that bonds are a great place to invest because bonds don’t lose money.”  At that point I pinched myself just to make sure I wasn’t dreaming…

Bonds can, and do lose money!  I have been writing on this subject for over a year now.  Recently, confirmation of my concern over the bond market has been vindicated.  On 3-28-13 I wrote an article titled:  Avoiding the Bond Bubble.  In that article I pointed out the risks and lack of value present in the bond market.  Let’s take a look at what has happened since that time[i]:

 

Index

Q2 2013

YTD 2013 (7-15-13)

1 Year (7-15-13)

Barclays US Aggregate Bond

-2.32

-2.45

-1.59

Barclays Long US Corp Bond

-5.74

-6.57

-3.54

Barclays Muni Trust

-2.97

-3.1

-1.03

Barclays US Muni High Yield

-4.08

-2.99

3.14

Barclays US Corp High Yield

-1.44

2.93

10.29

Barclays US Treasury TIPS

-7.05

-0.36

-5.74

Barclays US Treasury Long

-5.58

-9.21

-12.46

Citi US 10 Year Treasury

-4.53

-4.89

-4.18

Morningstar EM Composite Bond

-5.28

-5.67

1.31

 

 

 

Clearly the 2nd quarter of 2013 did not bode well for the bond market.  In addition to the losses experienced, during the month of June investors withdrew $43.78 billion from taxable bond funds and another $16.4 billion from municipal bond funds[ii].  Do people still think bonds are safe?  My guess is that as quarterly statements get delivered, many investors will be calling their broker looking for an explanation of how these supposedly “safe” investments lost money. Sadly, this may be just the beginning of what could be a very long and painful bear market for bonds.  While we can’t know just what the future will bring us, we do know with certainty that with the 10 year treasury now at 2.53%, there is still scarcely little value in the bond market and investors should continue to avoid this bloated asset class.

 

 

 

Ethan S. Braid, CFA

President

HighPass Asset Management

800 – 672 - 7916

www.highpassasset.com        

 

 

 

About the author of this article.

 

Ethan S. Braid, CFA is the founder of HighPass Asset Management – an independent, fee-only, registered investment advisory firm with a fiduciary duty to the clients it serves.  Mr. Braid has been passionate about managing client investment portfolios and providing customized financial planning advice since he started working in the investment industry 14 years ago. Mr. Braid earned a BS in Finance from Robert Morris University, an MBA from Cleveland State University and he is also a CFA Charterholder.

 

Mr. Braid is devoted to being an expert in the field of wealth management for high net worth individuals and families and for many years, has read one book per month on subject areas such as:  estate planning, retirement planning, investment analysis, mergers & acquisitions and behavioural finance.  Mr Braid also has a passion for business history with a focus on the late 19th & early 20th centuries.

 

When Mr. Braid is not helping clients, he enjoys: cooking, wine, exercise, his yellow Labrador retriever, fly fishing, hiking, travel, playing guitar, snowboarding and duck hunting.  Mr. Braid is a committee member of the Denver Chapter of Ducks Unlimited.

 

This article is provided by HighPass Asset Management for informational purposes only.  No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment or legal advice.

 



[i] All return data obtained from Morningstar.  Data is as of 7-15-2013

[ii] Morningstar Direct U.S. Open-End Asset Flows Update July 2013