3/06/2013 - Advisers warn bond rally maybeover
- Created: Wednesday, 06 March 2013 00:00
As the Dow Jones industrial average hit a record high Tuesday, some Wall Street advisers warned thata long rally in the bond market may be near its end. The Dow Jones industrial average hit a newrecord Tuesday, closing at 14,253.8. Bonds that have been a safe haven during the financial downturn noware less appealing. Photo Credit: AP,2011
As the Dow Jones industrial average hit a record high Tuesday, some investment advisers warned thata long rally in the bond market may be near itsend.
The Dow closed at 14,253.77 Tuesday, surpassing its previous high in 2007. After the stockmarket crashed in 2008 during the financial crisis, investors pulled money out of equities and poured moneyinto less risky U.S.bonds.
"The market hasn't gone anywhere roughly in five years if you're looking at the Dow, and obviously ifyou invested in bonds, you'd be doing better," said Keith Lanton, president of Lantern Investments Inc.,a Melville-based financial adviser. "I would not expect that tocontinue."
Over the past five years, investment-grade bonds and junk bonds have earned greater returnsthan stocks, based on a comparison of total returnindexes.
Since March 4, 2008, the FINRA/Bloomberg Active Investment Grade U.S. corporate bond and highyield total return indexes gained 37.7 percent and 57 percent respectively. Total return indexes forthe Standard & Poor's500 gained 27.8 percent, and the Dow Jonesgained 34.1percent.
Investors in fixed-rate bonds receive a steady stream of income in the form of an interestpayment. Inflation can decrease the value of that income stream, and rising interest rates can reduce the valueof the bond if the investor wants to sellit.
The return on the bond is described in terms of yield, which is derived from the interest rate and thecost of the security. Federal interest rates are near zero, and investors expect them to go up as theeconomy recovers.
Joan Lappin, chairman and chief investment officer of Gramercy Capital Management Corp.in Manhattan, said that for the past 30 years bonds have been a good investment as falling interestrates increased theirvalue.
"When bond yields start to rise you're going to get your clock cleaned," Lappin said. "It isn't a questionof if you will get your clock cleaned, it's only a question ofwhen."