The end of the year is always a good time for reflection, and
for thinking about what went well in our lives and what didn't.
From an investment perspective, one thing that fits in that
latter category are
investments in traditional bonds
But the New Year also brings with it the time to make
resolutions and changes. We believe that all investors should
consider reviewing their bond portfolio to be sure it remains
built to deliver their goals, whether those be income,
We touched on this in BlackRock's recently released list of
five things to know and five things to do in
, and with our view that interest rates are likely to rise, we
believe the risks embedded within certain parts of the market
have increased. Thus, you should rethink how you're invested.
Let's discuss the outlook first:
1. Modestly stronger growth should lead to slightly
higher interest rates. But we do not expect a sharp or rapid
acceleration. As the Federal Reserve begins to slow its
extraordinary bond-buying program, we believe the 10-year
Treasury yield will modestly climb around 0.5% by the end of
2. Low for Longer. It's important to note that while the
bond-buying program will be slowed, to avoid negative economic
consequences of a sharp rise in rates, the Fed will likely
promise to keep the
fed funds rate
low for some time.
3. Given the continued slow growth nature of the
recovery, inflation, now at a four-year low in the United States,
is likely to stay low at least through 2014.
The key point in #1 above is made nicely in this graphic
What does this mean for bond investors? And what investing
resolutions should you make in 2014?
Here are three we would offer:
1. Traditional bonds could experience losses. For
example, if we take a broad category of bond funds held by
investors such as the Morningstar Intermediate Bond Category, a
1% rise in interest rates would mean approximately a 5% loss in
principal. A 0.5% rise in rates could mean a 2.5% loss of
principal, which would offset the income from the coupon payments
and lead to overall losses. Longer maturity bonds hold more of
this interest rate risk than shorter-maturity bonds, so be
mindful of the maturities in your bond portfolio.
2. Since inflation is near flat, bonds designed to
protect against loss of value to inflation might not be worth
owning such as
Treasury Inflation Protected Securities
). Except in the longest maturities, in our view, they are
expensive and we would keep them at a minimum in a portfolio.
3. Bonds that trade based on credit, or the ability of
the issuer to pay back its obligations, offer a way to gain
income with lower interest rate sensitivity. While not
inexpensive, they generally offer higher yields and less
sensitivity to interest rate increases. In particular, we favor
high yield bonds.
Jeffrey Rosenberg, Managing Director, is BlackRock's
Chief Investment Strategist for Fixed Income, and a
regular contributor to
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The opinions expressed are those of Jeffrey Rosenberg as of
12/11/13 and are subject to change at any time due to changes
in market or economic conditions. The comments should not be
construed as a recommendation of any individual holdings or
Bonds and bond funds will decrease in value as interest
rates rise and are subject to credit risk, which refers to the
possibility that the debt issuers may not be able to make
principal and interest payments or may have their debt
downgraded by ratings agencies.