Many of my clients are invested in municipal, corporate, government or global bonds. They are well advised by me that the values have depreciated since the 10 year treasury yield backed-up in the past month. In fact, much of this volatility in the bond market has occurred for the first sustained period in several years.
I can say if you haven’t noticed the capital erosion for your bonds, either your head is in the sand or your advisor has neglected to inform you about the volatility in the fixed income markets. If the latter is what you’re faced with – it may be time to call me and get a second opinion on your fixed income portfolio. In fact, before I went independent and earned my stripes at a few of Wall Street’s largest brokerage firms, I was surprised to observe how management had to remind their advisor troops to pick-up the phone and alert their clients to market losses, the least favorite segment of the job of an advisor. In other words, your advisor needs to get out in from of pending bad news and be proactive about your portfolio losses – not reactive. Check your May and especially your June statements to really understand what you’re dealing with concerning your fixed income losses in these few months.
In May alone, US Treasury bonds lost an average of 6.8%, according to Morningstar, and Vanguard Extended Duration Treasury Index fund was also down over than 6 percent. High-yielding bonds and fixed income securities have both suffered even more, especially mortgage-backed securities and emerging market debt. Many mortgage investments firms reported losses over 8% in May and such losses are understandably nerve-wracking, especially when annualized. In the past 3 months the 10 year Treasury yield rose to 2.59 % (7/12/13) from 1.72%.
May’s sharp decline was sparked by the Fed amending its policy committee statement altering “the Committee continues to see downside risks to the economic outlook” to “the Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall.” This small change in the statement was enough to produce sharp selloffs in both bonds and stocks, completely overlooking the economic optimism and instead reading that the Fed is closer to justifying a reduction to its $85 billion monthly purchases of Treasuries and mortgage bonds [Barron’s]. Bernanke says that the central bank has yet to start reducing its monthly bond purchases; it may do so later this year; it may end those purchases by mid-2014; and short-term interest rates will be left alone until at least 2015. The Fed’s announcement that they were beginning to taper off the Quantitative Easing, and that it must eventually end, isn’t something that the markets had wanted to hear. It is difficult to reach equilibrium between keeping the markets placated with Quantitative Easing, and reminding the market that it is going to come to an end.
We aren’t out of the Gulf Stream yet, so expect the boat to continue rocking until the markets adjust to the QE taper as early as the fall, and we reach calmer waters. For fixed income investors, this is a time to cautiously ride it out and wait to exit the chop of the Gulf Stream. An ideal outcome will be to reinvest at lower bond prices, and continue sailing smoothly along the shores of fixed income, however only time will tell. This seems an appropriate analogy given the summer boating season.