By Walter Updegrave, senior editor
(Money Magazine) -- Question: I consider myself a good 401(k) citizen. I contribute the max, get the company match and have an age-appropriate level of stocks in my account. But one of the bond funds in my plan has a 10-year average return of about 9%, which is better than almost every stock fund. So I'm wondering whether I'd be better off just putting all my money into that bond fund. Would that make sense? -- Dan, Southfield, Mich.
Answer: Things are hardly ever black or white in the investing world. There's almost always an area of gray, more likely shades of gray. Which means it's not often that my answer can be completely unequivocal.
But your situation is one of the rare exceptions, so I want to make the most of this opportunity. Let me see, how should I put this?
No! Don't do it! Bad idea! Absolutely do not move all your money into that bond fund!
Of course, most of your investing compatriots have to one degree or another already been doing what you would like to do -- i.e., avoid stocks and buy bonds. From the beginning of 2009 to the end of last month, investors have poured a staggering amount of new money into bonds and bond ETFs -- more than $615 billion, according to Morningstar. Meanwhile, they've yanked some $3.9 billion from stock portfolios.
But I think you would be making a big mistake to follow their lead and invest your entire 401(k) account in that bond fund.
Why?
Retirement investing: Don't abandon stocks
For starters, it almost never makes sense to put all your retirement savings in one asset basket. You never really know which type of investment is going to provide the most generous returns in the future, so it's a good idea to protect yourself from picking the wrong one by spreading your money around.
If you transfer your entire 401(k) balance as you envision, you would not only be tying your retirement prospects to the performance of one asset class -- bonds -- you would also be pegging your future to the performance of a single fund. Instead of hedging your bets, you would be concentrating them.
But there's another compelling reason you ought to reconsider -- namely, the chances are low at best that the bond fund you find so attractive will be able to repeat its 9% annualized performance in the years ahead.
The reason is that over the past 10 years bond yields have dropped fairly dramatically, falling from roughly 6% or so at the beginning of this decade to less than 4% recently. That decline in interest rates acted as a tailwind for bond funds, creating capital gains on top of interest income and generating those eye-catching returns.
But with interest rates already so low today, the potential for further rate declines and more capital gains is limited to say the least. Ibbotson founder and investing guru Roger Ibbotson made this very point to me in a recent interview on the return potential for stocks vs. bonds.
If anything, investors are more concerned about the opposite occurring -- that is, rates rising and bond prices falling. The point, though, is that while you should never consider past returns a roadmap for the future, bonds today represent a case where past results might be an outright misleading indicator of future performance.
In short, I think you might end up sorely disappointed if you move your stash into that bond fund expecting it to reprise those 9% annual gains over the next 10 or so years.
That said, I don't think, as some people do, that the possibility of rising rates at some point in the future means you should totally avoid bonds or bond funds. As I've noted before, I don't buy into the whole bond-bubble brouhaha, or at least not enough to advise going to the extreme of eschewing bonds altogether. I think doing that would make about as much sense as shunning stocks -- i.e., none.
So what do I recommend that you do?
Basically, you want to spread your 401(k) stash among a blend of stock and bond funds that's right for your situation. You say that you have an age-appropriate level of stocks in your account. If that's the case -- and your stock stake is diversified among large and small stocks, growth and value and maybe a bit of international -- then maybe you don't have to change anything, other than your intention to hop into that bond fund.
But since you're thinking about how to invest your 401(k) money anyway, it's probably not a bad idea to re-evaluate your asset mix.
One way to do that is to see how your mix compares with that of a target-date retirement fund for someone your age. There are many target-date funds you might refer to, but I'd suggest checking out the ones that made our MONEY 70 list of recommended funds. I'm not saying you've got to duplicate their asset blend exactly. But you can use it as a starting point and then adjust according to your own tastes.
Once you've arrived at a stocks-bonds mix that seems right for you, plug it into Morningstar's Asset Allocator tool. Doing that will show you how that allocation might do in the future. By using the tool's sliders, you can also fiddle with the mix and see how that affects risk and return.
As a final check, you might want to plug your portfolio, as well as such information as your 401(k) account balance and the percentage of salary you're saving each year, into T. Rowe Price's Retirement Income Calculator. This will show you whether you're on track to a secure retirement, given your savings effort and investing strategy. If the outlook is iffy, you can see how adjustments like saving more and investing differently improve your prospects.
What you don't want to do, though, is set your course by looking in the rear-view mirror. That wouldn't be a smart way to drive your car, and it makes just as little sense for investing your 401(k).
From The CNN Money published on September 21, 2010
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German Government Bonds Fall as Japan Sells Currency Before Bund Auction
By Keith Jenkins - Sep 15, 2010 4:58 PM GMT+0800
German bonds fell as the Bank of Japan sold yen, curbing investors’ appetite for the euro- region’s safest assets before the German government sells 10- year securities.
Bunds also retreated before a report that economists say will show consumer prices in the euro area rose by 0.2 percent in August. Japan intervened in the currency market for the first time since 2004 after the yen reached a 15-year high against the dollar. The German government plans to sell 5 billion euros ($6.5 billion) of 10-year bonds today. Portugal will sell 750 million of 12-month Treasury bills.
“The Bank of Japan’s intervention gave risk assets a boost, and that spilled over and had a negative impact on bunds,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “The 10-year bund re-opening may give minor headwinds to the market, but not a major burden.”
The yield on the bund, Europe’s benchmark security rose 2 basis points to 2.4 percent as of 9:37 a.m. in London. It reached 2.47 percent on Sept. 13, the highest since Aug. 11. The 2.25 percent security maturing in September 2020 fell 0.17, or 1.70 euros per 1,000-euro face amount, to 98.73. The two-year note yield also gained 2 basis points, to 0.74 percent.
German bonds have declined this month, with the 10-year yield advancing 28 basis points, amid reports that indicate the global economic recovery is on track. Data on Sept. 11 showed China output rose 13.9 percent last month from a year earlier, faster than economists forecast.
Greek Spread
The extra yield investors demand to hold Greek 10-year debt instead of bunds fell 2 basis points to 898 basis.
Greece sold 26-week Treasury bills yesterday. Greek banks bought 70 percent of the bills, Imerisia newspaper said today, without saying where it got the information. Greece plans to sell 13-week bills on Sept. 21.
German bonds have returned 8.7 percent this year, compared with an 8 percent gain for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Portuguese debt has lost 4.5 percent, while Greek securities have given up 19 percent, the indexes show.
To contact the reporter on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net
From Bloombergs published on Sep 15, 2010 4:58 PM GMT+0800
German bonds fell as the Bank of Japan sold yen, curbing investors’ appetite for the euro- region’s safest assets before the German government sells 10- year securities.
Bunds also retreated before a report that economists say will show consumer prices in the euro area rose by 0.2 percent in August. Japan intervened in the currency market for the first time since 2004 after the yen reached a 15-year high against the dollar. The German government plans to sell 5 billion euros ($6.5 billion) of 10-year bonds today. Portugal will sell 750 million of 12-month Treasury bills.
“The Bank of Japan’s intervention gave risk assets a boost, and that spilled over and had a negative impact on bunds,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “The 10-year bund re-opening may give minor headwinds to the market, but not a major burden.”
The yield on the bund, Europe’s benchmark security rose 2 basis points to 2.4 percent as of 9:37 a.m. in London. It reached 2.47 percent on Sept. 13, the highest since Aug. 11. The 2.25 percent security maturing in September 2020 fell 0.17, or 1.70 euros per 1,000-euro face amount, to 98.73. The two-year note yield also gained 2 basis points, to 0.74 percent.
German bonds have declined this month, with the 10-year yield advancing 28 basis points, amid reports that indicate the global economic recovery is on track. Data on Sept. 11 showed China output rose 13.9 percent last month from a year earlier, faster than economists forecast.
Greek Spread
The extra yield investors demand to hold Greek 10-year debt instead of bunds fell 2 basis points to 898 basis.
Greece sold 26-week Treasury bills yesterday. Greek banks bought 70 percent of the bills, Imerisia newspaper said today, without saying where it got the information. Greece plans to sell 13-week bills on Sept. 21.
German bonds have returned 8.7 percent this year, compared with an 8 percent gain for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Portuguese debt has lost 4.5 percent, while Greek securities have given up 19 percent, the indexes show.
To contact the reporter on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net
From Bloombergs published on Sep 15, 2010 4:58 PM GMT+0800
Bond Buyers Getting Burned by Going Long as Yields Climb: Credit Markets
By Shannon D. Harrington and Tim Catts - Sep 13, 2010 10:24 AM GMT+0800
Investors who snapped up the biggest supply of long-maturity bonds since March last month are being punished as interest rates climb on diminished concerns the U.S. will relapse into recession.
Corporate bonds due in 15 years or more have lost 3.15 percent since Aug. 31 while notes maturing in 1 to 10 years lost 0.67 percent, Bank of America Merrill Lynch index data show. In the three months ended in August, the longer-maturity bonds had gained 11 percent, more than double the 5 percent gain for shorter-dated securities, as record-low yields sent investors searching for higher-paying fixed-income securities.
The losses underscore the extra risk in the longest-maturity bonds if the economy recovers faster than investors expect, causing interest rates to jump and eroding the value of the debt. The duration of company bonds, a measure of the securities’ price sensitivity to yield changes, reached a record at the end of August, according to Bank of America Merrill Lynch’s U.S. Corporate Master index.
“Now is not the time to reach for yield by extending out on the yield curve,” said James Barnes, a fixed-income portfolio manager at Wyomissing, Pennsylvania-based National Penn Investors Trust Co. “If we grow very sluggishly, it still bodes well for interest rates going higher.”
Companies taking advantage of lower yields last month sold $14.4 billion of U.S. dollar-denominated debt maturing in more than 15 years, according to data compiled by Bloomberg. That’s the biggest sum since March, when $15.6 billion of the bonds were sold.
Rising Treasury Yields
The yield on the 10-year Treasury note has climbed 32 basis points, or 0.32 percentage point, this month to 2.79 percent as of Sept. 10. The yield had dropped to the lowest since January 2009 after the Federal Reserve said some policy makers saw greater risks to the economic recovery and that it would maintain holdings of securities to prevent money from being drained out of the financial system it helped prop up after the credit seizure two years ago.
Elsewhere in credit markets, the extra yield investors demand to hold corporate bonds rather than government securities fell to the lowest in a month. Hewlett-Packard Co. and Home Depot Inc. led $105.9 billion of bond sales worldwide last week, more than double the pace of the period ended Sept. 3. The cost of protecting corporate debt from default in the U.S. fell for a second week, benchmark indexes of credit-default swaps show. Leveraged loan prices rose to the highest since Aug. 11.
Hewlett-Packard Offering
Spreads on company bonds narrowed 4 basis points for the week to 175 basis points, the lowest since Aug. 10, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. Average yields climbed to 3.637 percent, compared with 3.595 percent on Sept. 3.
Hewlett-Packard, the world’s largest personal-computer maker, and Atlanta-based Home Depot led the surge of offerings as companies sought to take advantage of U.S. investment-grade borrowing costs near the lowest on record.
Palo Alto, California-based Hewlett-Packard’s $3 billion offering consisted of $800 million of two-year floating-rate securities and $1.1 billion each of three- and five-year debt, Bloomberg data show. Home Depot, the largest-home improvement retailer, sold $1 billion of debt split evenly between 10- and 30-year maturities in its first offering since December 2006.
Yields as of the end of last week were at 3.958 percent, after reaching as low as 3.743 percent on Aug. 24, the lowest in the measure’s history dating to October 1986, according to the Bank of America Merrill Lynch U.S. Corporate Master index.
Credit Swaps Decline
The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 1 basis point last week to 102.92 basis points, the lowest since Aug. 9, according to prices from Markit Group Ltd. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings declined 0.03 basis point to 105.87, Markit prices show.
Today, the Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan dropped 3 basis points to 117 basis points, Barclays Plc prices show.
The indexes typically fall as investor confidence improves and rise as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The Standard & Poor’s/LSTA US Leveraged Loan 100 Index rose 0.1 cent for the week to 89.67 cents on the dollar. The index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, returned 4.62 percent this year.
Duration Measure Falling
In emerging markets, relative yields rose 2 basis points for the week to 277 basis points, according to JPMorgan Chase & Co. index data. Spreads soared as high as 289 basis points on Sept. 7 before declining in each of the next three days.
The duration of U.S. investment-grade corporate bonds reached 6.56 years on Aug. 31, the highest since at least 1996, Bank of America Merrill Lynch index data show. The measure, which began the year at 6.2 years, has since fallen back to 6.43.
“I would not be applying fresh capital to the long end of the yield curve,” said Chad Morganlander, a money manager at Stifel Nicolaus & Co., which oversees $90 billion. “Any sign of economic vitality, without government assistance, would be deleterious.” Morganlander, who’s based in Florham Park, New Jersey, said he’s buying investment-grade securities that mature in five years or less.
Yields on 10-year Treasury notes reached a one-month high on Sept. 10 on evidence the world’s largest economy isn’t falling into another recession.
NextEra, Abbott
Benchmark debt yields had a third week of gains in the longest stretch of advances since October. The Commerce Department reported Sept. 10 that inventories at U.S. wholesalers rose in July by the most in two years on a rebound in demand. A 1.3 percent increase in the value of inventories was three times the median estimate in a Bloomberg News survey of 32 economists.
Futures show a 9.5 percent chance the Fed will raise its target rate for overnight loans between banks by at least a quarter-percentage point by March, up from 7.5 percent a week ago. The central bank has left the rate unchanged in a range of zero to 0.25 percent since December 2008.
Bonds due in 15 years or more from Juno Beach, Florida- based NextEra Energy Inc., the largest U.S. producer of renewable energy, have lost 4.28 percent on average this month, Bank of America Merrill Lynch index data show. Longer-dated bonds of drugmaker Abbott Laboratories of Abbott Park, Illinois, declined 4.43 percent, while debt from Armonk, New York-based computer-services provider International Business Machines Corp. fell 4.08 percent.
IBM Bonds Fall
IBM’s $1.52 billion of 5.6 percent bonds due in 2039 have dropped 5.9 cents to 112.1 cents on the dollar since Aug. 25, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The yield rose to 4.82 percent from 4.49 percent.
Investors should seek corporate bonds that pack a bigger cushion against spikes in interest rates, including the highest- rated high-yield, high-risk bonds, according to strategists at Goldman Sachs Group Inc.
Speculative-grade or junk bonds, rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P, typically offer yields that compensate investors more for the risk that the company defaults. As a result, the bonds may gain more from declining default risk than they lose from rising interest rates, said Alberto Gallo, a New York-based strategist at Goldman Sachs.
‘More Penalized’
“If rates rise, investment-grade will be more penalized because of its higher duration and because rates are a higher percentage of total yield,” Gallo said in an interview. “If the economy grows, spreads can compress and absorb the rise in rates. However, spreads are a smaller percentage of the yield in investment-grade than they are in high yield.”
Fixed-income investors also may hedge against rises in interest rates with derivatives contracts.
U.S. corporate bonds in the BB rated tier, the highest in speculative grade, yield 468 basis points more than similar- maturity Treasuries, Bank of America Merrill Lynch index data show. The spread is almost double the 239 basis points offered by BBB tier bonds, the lowest investment-grade ratings. The average spread on all investment-grade bonds is 187 basis points.
To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net; Tim Catts in New York at tcatts1@bloomberg.net
From Bloomberg published on Sep 13, 2010 10:24 AM GMT+0800
Investors who snapped up the biggest supply of long-maturity bonds since March last month are being punished as interest rates climb on diminished concerns the U.S. will relapse into recession.
Corporate bonds due in 15 years or more have lost 3.15 percent since Aug. 31 while notes maturing in 1 to 10 years lost 0.67 percent, Bank of America Merrill Lynch index data show. In the three months ended in August, the longer-maturity bonds had gained 11 percent, more than double the 5 percent gain for shorter-dated securities, as record-low yields sent investors searching for higher-paying fixed-income securities.
The losses underscore the extra risk in the longest-maturity bonds if the economy recovers faster than investors expect, causing interest rates to jump and eroding the value of the debt. The duration of company bonds, a measure of the securities’ price sensitivity to yield changes, reached a record at the end of August, according to Bank of America Merrill Lynch’s U.S. Corporate Master index.
“Now is not the time to reach for yield by extending out on the yield curve,” said James Barnes, a fixed-income portfolio manager at Wyomissing, Pennsylvania-based National Penn Investors Trust Co. “If we grow very sluggishly, it still bodes well for interest rates going higher.”
Companies taking advantage of lower yields last month sold $14.4 billion of U.S. dollar-denominated debt maturing in more than 15 years, according to data compiled by Bloomberg. That’s the biggest sum since March, when $15.6 billion of the bonds were sold.
Rising Treasury Yields
The yield on the 10-year Treasury note has climbed 32 basis points, or 0.32 percentage point, this month to 2.79 percent as of Sept. 10. The yield had dropped to the lowest since January 2009 after the Federal Reserve said some policy makers saw greater risks to the economic recovery and that it would maintain holdings of securities to prevent money from being drained out of the financial system it helped prop up after the credit seizure two years ago.
Elsewhere in credit markets, the extra yield investors demand to hold corporate bonds rather than government securities fell to the lowest in a month. Hewlett-Packard Co. and Home Depot Inc. led $105.9 billion of bond sales worldwide last week, more than double the pace of the period ended Sept. 3. The cost of protecting corporate debt from default in the U.S. fell for a second week, benchmark indexes of credit-default swaps show. Leveraged loan prices rose to the highest since Aug. 11.
Hewlett-Packard Offering
Spreads on company bonds narrowed 4 basis points for the week to 175 basis points, the lowest since Aug. 10, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. Average yields climbed to 3.637 percent, compared with 3.595 percent on Sept. 3.
Hewlett-Packard, the world’s largest personal-computer maker, and Atlanta-based Home Depot led the surge of offerings as companies sought to take advantage of U.S. investment-grade borrowing costs near the lowest on record.
Palo Alto, California-based Hewlett-Packard’s $3 billion offering consisted of $800 million of two-year floating-rate securities and $1.1 billion each of three- and five-year debt, Bloomberg data show. Home Depot, the largest-home improvement retailer, sold $1 billion of debt split evenly between 10- and 30-year maturities in its first offering since December 2006.
Yields as of the end of last week were at 3.958 percent, after reaching as low as 3.743 percent on Aug. 24, the lowest in the measure’s history dating to October 1986, according to the Bank of America Merrill Lynch U.S. Corporate Master index.
Credit Swaps Decline
The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 1 basis point last week to 102.92 basis points, the lowest since Aug. 9, according to prices from Markit Group Ltd. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings declined 0.03 basis point to 105.87, Markit prices show.
Today, the Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan dropped 3 basis points to 117 basis points, Barclays Plc prices show.
The indexes typically fall as investor confidence improves and rise as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The Standard & Poor’s/LSTA US Leveraged Loan 100 Index rose 0.1 cent for the week to 89.67 cents on the dollar. The index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, returned 4.62 percent this year.
Duration Measure Falling
In emerging markets, relative yields rose 2 basis points for the week to 277 basis points, according to JPMorgan Chase & Co. index data. Spreads soared as high as 289 basis points on Sept. 7 before declining in each of the next three days.
The duration of U.S. investment-grade corporate bonds reached 6.56 years on Aug. 31, the highest since at least 1996, Bank of America Merrill Lynch index data show. The measure, which began the year at 6.2 years, has since fallen back to 6.43.
“I would not be applying fresh capital to the long end of the yield curve,” said Chad Morganlander, a money manager at Stifel Nicolaus & Co., which oversees $90 billion. “Any sign of economic vitality, without government assistance, would be deleterious.” Morganlander, who’s based in Florham Park, New Jersey, said he’s buying investment-grade securities that mature in five years or less.
Yields on 10-year Treasury notes reached a one-month high on Sept. 10 on evidence the world’s largest economy isn’t falling into another recession.
NextEra, Abbott
Benchmark debt yields had a third week of gains in the longest stretch of advances since October. The Commerce Department reported Sept. 10 that inventories at U.S. wholesalers rose in July by the most in two years on a rebound in demand. A 1.3 percent increase in the value of inventories was three times the median estimate in a Bloomberg News survey of 32 economists.
Futures show a 9.5 percent chance the Fed will raise its target rate for overnight loans between banks by at least a quarter-percentage point by March, up from 7.5 percent a week ago. The central bank has left the rate unchanged in a range of zero to 0.25 percent since December 2008.
Bonds due in 15 years or more from Juno Beach, Florida- based NextEra Energy Inc., the largest U.S. producer of renewable energy, have lost 4.28 percent on average this month, Bank of America Merrill Lynch index data show. Longer-dated bonds of drugmaker Abbott Laboratories of Abbott Park, Illinois, declined 4.43 percent, while debt from Armonk, New York-based computer-services provider International Business Machines Corp. fell 4.08 percent.
IBM Bonds Fall
IBM’s $1.52 billion of 5.6 percent bonds due in 2039 have dropped 5.9 cents to 112.1 cents on the dollar since Aug. 25, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The yield rose to 4.82 percent from 4.49 percent.
Investors should seek corporate bonds that pack a bigger cushion against spikes in interest rates, including the highest- rated high-yield, high-risk bonds, according to strategists at Goldman Sachs Group Inc.
Speculative-grade or junk bonds, rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P, typically offer yields that compensate investors more for the risk that the company defaults. As a result, the bonds may gain more from declining default risk than they lose from rising interest rates, said Alberto Gallo, a New York-based strategist at Goldman Sachs.
‘More Penalized’
“If rates rise, investment-grade will be more penalized because of its higher duration and because rates are a higher percentage of total yield,” Gallo said in an interview. “If the economy grows, spreads can compress and absorb the rise in rates. However, spreads are a smaller percentage of the yield in investment-grade than they are in high yield.”
Fixed-income investors also may hedge against rises in interest rates with derivatives contracts.
U.S. corporate bonds in the BB rated tier, the highest in speculative grade, yield 468 basis points more than similar- maturity Treasuries, Bank of America Merrill Lynch index data show. The spread is almost double the 239 basis points offered by BBB tier bonds, the lowest investment-grade ratings. The average spread on all investment-grade bonds is 187 basis points.
To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net; Tim Catts in New York at tcatts1@bloomberg.net
From Bloomberg published on Sep 13, 2010 10:24 AM GMT+0800
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