Well, it’s starting to happen…… December 15, 2010
Posted by forwardfinancialplanning1 in Bond Index Funds, Bond Mutual Funds, Economic Conditions, Income Taxes, Long Term Bond Funds, Short Term Bond Funds.add a comment
Several postings on this site have commented on the huge investment inflows into bonds and bond mutual funds during the past two years. These cash flows coincided with a historic decline in bond yields to levels not seen since the Great Depression. Since bond prices move inversely to yields, bond prices increased and it’s easy to surmise that the substantial cash inflows into bonds represent “performance chasing”. As investment history has proven time and time again, performance chasing usually ends badly.
The inevitable downfall may have begun. The tax compromise in Washington seems to have awakened the “bond vigilantes” to the fact that the economy will most likely continue to improve. This, of course, will cause the Fed to end its inordinately accomodating monetary policy, and result in rising interest rates.
This seems to have started in the past month. The yield on 10 year Treasury Bonds has risen from 2.4% in mid-October to 3.36% this week. As expected, the Vanguard Total Bond Market Fund (which tracks the Barclays Aggregate Bond Index) has fallen 3.4% in price (not including reinvested dividends) since November 4. To put this decline in perspective, the price drop equals more than an entire year’s interest yield. With the spector of inflation looming somewhere down the road, it will be interesting to watch how long this trend persists.
Seeking yield??? Use caution!!! December 23, 2009
Posted by forwardfinancialplanning1 in Bond Index Funds, Bond Mutual Funds, Intermediate Term Bond Funds, Money Market Mutual Funds.add a comment
Many savers have been frustrated by the record low yields we have been experiencing with seemingly safe, short term instruments like savings accounts, CD’s and money market mutual funds. This has caused many to “stretch” for higher yields by shifting their dollars into bond mutual funds. Morningstar recently noted this trend in an article that observed that money market fund balances have fallen from a high of $3.6 trillion in January 2009 to a low of $3.2 trillion as of October 31. This outflow from money market funds was accompanied by an inflow into taxable bond funds of $233.7 billion. Meanwhile, domestic stock mutual funds continued to see outflows for the first nine months of 2009 totalling $4.4 billion. A logical conclusion is that many investors are incorrectly perceiving bond mutual funds as a higher yielding, yet comparably safe alternative to money market funds. Bond mutual funds will clearly offer higher yields than money market funds as evidenced by the 3.74% yield (30 day SEC yield as of 12/22/09) of the Vanguard Intermediate-Term Bond Index Fund compared to the paltry 0.06% yield (7 day SEC yield as of 12/22/09) of the Vanguard Prime Money Market Fund. However, don’t be fooled into believing that this additional yield comes without risk. Bonds funds can and do fluctuate in value!! A case in point is the recent drop of the aforementioned Vanguard bond fund from an NAV of $10.93 per share on December 17 down to $10.77 on December 22. This 1.46% decline consumed several months worth of the so-called higher yield. So, keep in mind that bond funds, while clearly less volatile than equity funds, do entail risks. Funds that will be needed in the very immediate future do not belong in bond mutual funds.
