Breakout

2 of the 3 Reasons to Own Bonds Have ‘Completely Eroded’: Heather Hughes

Jeff Macke
Breakout

Given the amount of time and money the FOMC spends trying to control yields, bonds have been on a wild ride. Six months ago the rate on a 10-year note (^TNX) was under 1.7% and there was little conversation about that number going higher anytime soon. Even when the yield crept slightly over 2% in early June no one was too worried.

Then, during a June 19th press conference, Federal Reserve Chairman Ben Bernanke started tossing around metaphors about aircraft carriers and race cars. Though Bernanke himself never used the word "taper," traders read Bernanke's comments as a vow to start pulling back on the fed's $85 billion per month quantitative easing program. The bond market started going nuts.

In less than a week 10-year treasury yields rose 18% to 2.59%. By September 5th the 10-year peaked at 2.98% prior to a pullback nearly as crazy as the ride higher had been. The fluctuations left fixed income investors reeling; not a normal condition for those seeking "risk free" investments.

In the attached video, Sun America's Heather Hughes picks up the narrative. "Right now we're back below 2.6% on the 10-year, but we should be range bound between 2.6% and 2.7%, maybe headed back towards 3% by the end of the year." Hughes watches such things all day and not even she is willing to put much confidence in what should be happening and how things have been playing out in 2013.

As Hughes says, everything longtime investors have been taking for granted about investing in the most conservative extant has been turned on its ear. As Hughes says, there are three reasons to own bonds. Stability, income and capital appreciation. As it stands "two out of three, income and stability, are now completely eroded."

That leaves capital appreciation. With such maddening volatility, not even professional bond traders are banking on the next big move. Mom and pop shouldn't go anywhere near that type of gambling.

"Year to date, the average corporate bond fund is down 2%. Last quarter we were down 1% or flat on the average taxable corporate bond fund. Investors are seeing red on their statements," Hughes concludes. "Stocks may be the only game in town."

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