Investors be warned: The end is nigh for high US bond yields
11
Feb
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
Tags:
Treasury bills US bonds
I agree with all the above and with the fundamentals of U.S figures from Employment to Housing picking up, we will start to see a pick up in GDP and growth globally.
But, as always, stock markets tend to move first and this has been underpinned by the all time low base rates set by the central banks, giving benign growth a boost, thus pushing investment into risk assets and away from (almost flat yielding) government bond yields.
Now that indices are near their all time highs and corporate companies have (thankfully)seen their share price swell too, it leads me to think stocks have had their nice (undeserved) run that’s not equal to its past stagflation period !
With interest rate appreciation around the corner too, that would usually lead to a risk off decision and a move away from stocks even with the welcome proof of growth and green shoots appearing.
Therefore, with Asia still advancing like a train with no brakes, Europe avoiding Armageddon (for now) and the U.S pushing ahead nicely, I would feel more easier in fundamental commodity investments .i.e:-
1. Base metals, from the ever increasing growing global populations and demand increasing with the now global rebound occuring,
2. Gold , from the fundermental fact of mining more and resourcing less. Also the wealthier Indian and Asian demands, equalled with it still being a safe haven tool.
3. Oil, always in demand and will increase with new global growth projections, continuing geo-political situations in the middle east and now unnervingly North Korea tensions under the spot lights.