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Thomas Kenny

Bonds Blog

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Bond Market Update - May, 2014

Friday May 16, 2014

The market has a way of making fools of those who venture predictions, and that's certainly the case when it comes to bonds in 2014. Late last year, there was a nearly universal consensus that the economy would rebound and bonds would perform poorly in 2014. In fact, the opposite has occurred: growth has slowed and bonds have rallied sharply, outpacing stocks and punishing those who chose to exit their bond funds. While my 2014 outlook struck a more positive note than most, it also failed to see what was in store for bonds in the first half.

The year is still young, but the rally has been very impressive thus far - so impressive, in fact, that it raises questions about whether the economy is on much shakier ground than the current consensus would indicate. Investment-grade bond funds are up about 3.5%, long-term bond funds have produced returns in the double digits, and even the emerging markets - a weak spot in 2013 - are up about 7%. Investors have taken note, as bond funds have begun to see renewed inflows of cash.

For now, investors would probably do well to keep their return expectations in check. Bonds have come a long way in a short period of time, and its unlikely the returns of the past few months can continue at their current pace. And if they do, it will be a significant warning signal about slowing growth - something that nobody wants to see. Still, the lesson remains: shifting your allocation on the basis of fear, as many did in late 2013, almost always costs investors more than it saves.

Reassessing Fed Policy on a Day-to-Day Basis is Foolish

Saturday April 5, 2014

It's time for investors to calm down. With the U.S. Federal Reserve now well into the process of tapering its quantitative easing policy, investors are tripping over themselves to interpret how each individual piece of economic data affects the potential timing of the Fed's first interest-rate increase. Read More...

The Best and Worst Bond ETFs of the First Quarter

Tuesday April 1, 2014

The first three months of the year brought a recovery in the bond market, as outlined in my First Quarter Bond Market Performance Overview, providing relief to the owners of bond funds and ETFs. Read More...

Despite an Ugly 2013, Actively Managed Bond Funds Have Outperformed Over Time

Thursday March 20, 2014

It's a widely held belief that index funds outperform actively managed funds over the long term, and that's certainly been the case when it comes to stock funds. In the bond world, however, managers have added meaningful value in recent years. Read More...

The Fed Shifts Policy, Markets Overreact... Again

Wednesday March 19, 2014

The financial markets were spooked on Wednesday afternoon when the new U.S. Federal Reserve chairperson, Janet Yellen, refined the Fed's guidance for future rate policy. Read More...

Muni Market Relieved as Puerto Rico Finalizes Bond Offering

Tuesday March 11, 2014

For now, bond investors can remove Puerto Rico from their list of issues to worry about. Since last year, the perilous state of the island's finances has led to concerns about a possible default. If such an event had occurred, the reverberations would have been felt throughout the municipal bond market in general, and among funds holding Puerto Rican debt in particular.

These concerns were alleviated today when the country successfully issued $3.5 billion of 21-year debt at a yield of 8.727%. The offering received more than $16 billion in orders, indicating that investors remain hungry for yield even with the high risk associated with Puerto Rico. Keep in mind, this is a tax-exempt offering so the tax-equivalent yields are even higher, particularly in locales with a state and/or local income tax.

Following the offering, the ratings agency Standard & Poor's removed Puerto Rico from "CreditWatch" status, which indicates Read More...

February 2014 and Year-to-Date Bond Market Performance

Friday February 28, 2014

Continued evidence of sluggish economic conditions helped the bond market deliver a second straight month of positive returns in February.

The most recent phase of the rally had a different character than the move that occurred in January. During the first month of the year, concerns about turmoil in the emerging markets, together with signs of slower growth, fueled a "flight to quality" that benefited the rate-sensitive areas of the market (including long-term Treasuries, TIPS, mortgage-backed securities, and municipals). At the same time, the credit-sensitive segments - while positive - came up short in terms of their total return. In February, this relationship changed: a revival in investor risk appetites, along with a substantial gain in stock prices, fueled outperformance for Read More...

The 10-Year Treasury Again Tests the Bottom End of its Trading Range

Thursday February 27, 2014

The financial markets have a way of confounding expectations, and that has certainly been the case with U.S. Treasuries so far this year. At the close of 2013, the consensus view was that Treasury yields would continue to trend higher in 2014 amid an environment of improving economic growth and Federal Reserve tapering. (Many of these views can be found in the "What the Experts are Saying" section of my 2014 Bond Market Outlook). So far, however, the bearish predications have been way off the mark. After closing 2013 at 3.02%, the yield on the 10-year Treasury had declined below 2.65% on February 27 (as its price rose).

This is a notable development, since it Read More...

Why Putting Bond Funds in an IRA Can Make Sense

Wednesday February 26, 2014

Individual Retirement Accounts (IRAs) are often thought of as being the appropriate vehicle for long-term investments that generate big capital gains. For many investors, however, that may not necessarily be the case. Since income is taxed at a higher rate than capital gains, IRAs can be a wise choice for investments with higher yields.

Consider a high yield bond fund with a yield of 5.5%. In a taxable account, an investor in the 25% bracket only receives an after-tax yield of 4.1%. At the same time, someone who owns the same fund in a tax-deferred account will benefit from the full, 5.5% yield on the fund. Using an IRA to invest in taxable bonds can therefore be a wise choice for those who are looking to minimize the impact of taxes on their investment income. To learn more about this topic, see my article "Should You Own Bonds in an IRA?"

Also see:

How are Mutual Funds Taxed?

Ten Ways to Lower Your Mutual Fund Tax Bill

How Fast is the Economy Growing? The Answer is Just around the Corner.

Tuesday February 25, 2014

The U.S. economy, being the complex entity that it is, doesn't shift gears in a linear fashion. Instead, it experiences ebbs and flows from month to month and quarter to quarter.

This pattern has been on display in the past six months. During the early to mid autumn, a series of better-than-expected economic reports fueled speculation that the economy had finally emerged from the doldrums and was set for strong growth in 2014. However, a tough winter for most of the United States has put a damper on economic activity. According to Bespoke Investment Group, over 20 million people had experienced snowfall of at least six inches through the end of January - and this doesn't even include the storms that hit the northern part of the country in February.

This foul weather has acted as a major headwind for the economy, since construction, retail sales, and general business activity stalls while people are cozied up in front of the fireplace. The result: Read More...

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