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What goes up comes crashing down: Bonds in the doghouse (Part 1)

Senior Credit Analyst

After a couple weeks of renewed glory, bonds are now back in the investor’s doghouse

The bond market has been extremely volatile over the past two months. Investors keep flip-flopping their opinions on whether bonds are a good place to be.

Despite a dovish (not aggressive) statement by the Federal Open Market Committee (FOMC) last week followed by a weak jobs report, investors are starting to realize that bonds have more downside than upside. The weak jobs reports, the noise about a new dovish Fed Chairman, and the lack of economic improvement may continue to kick the monetary easing can down the road. After all, a previous survey reported by ISI (International Strategy & Investment) stated that 40% of investors expected tapering by September 2013.

(Read more: High yield bonds, the pain continues and will only get worse)

Too much of a gamble

I believe that while most investors may not really feel that tapering will start in September, betting on a delayed timeline may be too much of a gamble. No one wants to hold the bond hot potato when the music stops, so most investors are starting to clear out of bonds.

Could the bond market (BND) pick up and perhaps even bounce in September if quantitative easing continues? Yes, but the downside is much higher. Plus, the interest rate curve has already increased in the longer end of the curve, so while the short-term rates may remain low, the longer-dated bonds have already priced in an expectation of higher interest rates—whether its short terms move in September or March.

Read on to review the high yield bond outflows last week

(Read more: Why MLPs provide excellent risk-reward for investors)

Continue to Part 2

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