What to do about the bond market?
August 4, 2009
There has been lots of commentary about were bonds are headed to. Needless to say we are at very low bond yield levels. They are historic in my world. They are not super low or historic in broader or longer time frame parameters. I know that records have been set as to low yields but what I am referring to more is the duration of these low yields.
This is really the question. It is all well and fine to suggest that yields can only go one direction, namely higher, but more importantly how long are they going to languish at these levels. If you are a fan of the current stock market, you had better hope that it is for a long time. In my opinion the primary reason for the stock markets current “life” is the willingness for major money to assume a bit more risk. With essentially a losing return against life (inflation, cost of living in general, the price of gas!!) the negligible return one is getting from their bonds just doesn’t cut it. Hence the need to take on more risk. The first leg up in the stock market was from a ridiculously oversold bailout of wanton selling from the end of’08 into the first quarter of’09. The current holding of those gains is the normal re-allocation of funds from the super safe (no return on my money) to the somewhat more risky but higher return potential of corporate bonds and the stock market. This has allowed the market to shake of the need to double bottom that all the pundits were scaring us with over the last couple of months and maintain levels that are very much more comfortable. Simply put, it has allowed those who want or need to take profits to do so as new money has come into the market taking on that risk from the early speculative entrants that have now gone back to side lines. Their problem is that they now have to re-enter the market in new ways at higher levels.
There will be setbacks, but I do not think they will be long term or dramatic.
That of course is the rub. If the market gets to high to quick it will require the Federal Reserve (Bernanke in the states) and our own Governor Carney at the Canadian Central bank to start raising rates and tightening money. This will of course raise yields and reduce the face value of your bonds. The great Central Bank dance. Raise rates and slow the economy, lower rates (or leave them the same) and run the risk of overheating the economy and boosting inflation.
So this is why you better hope that rates stay were they are for a long time, because if they start going higher more money will go back to the bond market as yields improve. There is always a little latitude in what I have just said (give or take a couple of basis points).
So what to do? Well this is what I know:
- Lock in your mortgage for as long as you are comfortable.
- Renegotiate it if you can
- Get some form of coverage for your bond portfolio
- Or shift some of your funds (bond money) to quality higher yielding preferreds.
There are more specific things you can do but that should be enough for now.
Yours,
Ritch
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