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The Bond Market

by Sergio Mariaca on Sep 1, 2011 3:07:00 PM |Share:

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Many investors continue to prefer bonds, even with interest rates at historically low levels.  “Every time there is a little bit of a ripple, you see….individuals moving into Treasuries and other bonds,” said Lisa Shalett, chief investment officer at Merrill Lynch Global Wealth Management. “There is an absolute focus on principal protection and capital preservation, with a desire to drive returns almost exclusively from income,” Miss Shalett said.  (Source:  WSJ, July 1, 2011)

Many investors acknowledge that although bond yields are low, many think that prices of Treasury securities could keep climbing (at the same time their yields are falling) as long as the economy continues to show signs of sputtering and the threat of financial chaos in Europe continues.  Many investors wonder whether the bond market can still continue its solid return. “Investors in U.S. Treasuries are being lulled into a false sense of security by positive returns this year because their yield isn’t high enough relative to inflation,” according to Bill Gross who oversees the largest bond fund at Pacific Investment Management Company, LLC. (Source: Investment News) Past performance is no guarantee of future results.

One of the major concerns of bond investors at this time is the possibility of rising interest rates, which can translate into losses for bond investors. As you probably know, interest rates and bond prices work opposite of each other. As interest rates go up, the value of bonds goes down.  In a recent presentation, Daniel O’Neil, president and chief investment officer of DirexionShares, said, “A 1% rate hike could drop the value of a 30-year U.S. Treasury Bond by 14.5%.”  (Source:  Financial Advisor Magazine, July 2011)
Countries such as the U.S. are intentionally keeping interest rates low to help reduce record debt levels, Mr. Gross said.  The Federal Reserve has kept its target rate at a record-low range of 0.00-0.25% since December 2008 to help stimulus growth in the face of the worst recession since the Great Depression.  (Source: Investment News, June 5, 2011)

Let’s now change the subject to municipal bonds. Since late last year, many investors have been selling their municipal bonds amid fears that cash-strapped states might not be able to make their bond payments. Many advisors, however, say that these concerns are overblown and that the entire sector is getting judged unfairly.

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