Lately, I’ve been telling listeners on my radio show to be careful of owning big baskets of bonds through exchange traded funds and mutual funds. Credit spreads have tightened up considerably since a year ago which has given all kinds of bonds huge capital gains. But, now we are starting to see credit spreads in the normal range. I believe the easy money for many bond portfolios is behind us because of this. I’m still an advocate of individual bonds, especially bonds that are tied to various indexes that can give us capital gains. But, standard bonds that pay interest every month or six months may have peaked. In fact, the iShares Investment Grade Bond Fund (LQD) has rolled over and the uptrend it’s been in since March looks as if it’s broken.
Interest rates in this country and elsewhere are going to rise eventually. That’s going to put pressure on bonds and stocks. If you own an individual bond, your principal is still safe but the price of the bond will fall. Eventually, that bond will come back to par. On the other hand, a bond mutual fund or exchange traded fund doesn’t have that feature. A lot of money has piled into bond funds because of the performance and “safety”. But, I think many of those are extremely dangerous right now. In addition to the LQD rolling over, the municipal bond basket has been under some pressure lately as well.
It’s not time to abandon all types of bonds, but the ones that are directly inversely correlated with interest rates are going to get hurt. Be careful.
This post published at www.karleggerss.com
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