Investors be warned: The end is nigh for high US bond yields
Recently, I’ve warned that it’s becoming increasingly apparent that investors need to drop their addiction to US Treasury bonds – or they potentially face being exposed to huge losses.
So, why is this? It’s largely due to the fact that it is unlikely that interest rates will decline any further and, when rates do rise, bond values will plummet.
Therefore, rather than hanging around waiting for their investments to devalue, investors should consider rebalancing their portfolios at their earliest convenience.
Thanks to the Federal Reserve’s bond-buying programme, which has held down interest rates, bond investors have enjoyed good returns in recent years. But whilst it is expected that the Fed will keep down rates – for the time being at any rate – by buying $85bn’s worth of bonds each month, this is unlikely to last past October 2014.
People piled into bonds as a result of economic scares, such as the US fiscal cliff, the eurozone saga and the slowing of growth in China. But now, as things appear to be stabilising somewhat, and with an interest rate rise looming on the horizon, keeping a large amount of your investable assets in bonds can no longer be viewed as a ‘safe’ option as they will provide ‘coupon-only’ yields – indeed, there’s a real chance such a stance could make you poorer.
As such, it might be time to take the bull by the horns and consider increasing exposure to well-diversified, higher risk/higher return investment opportunities. Failure to do so, could lead Treasury bond investors into an investment dead-end.
Nigel Green deVere Group
Blog written on 11th of February 2013