With many investors seemingly on the precipice of selling all of the bonds out of their portfolios, the fixed-income experts have stepped in with some sensible talk to coax panicky investors off the ledge.
The experts’ challenge is to convince investors that while bonds’ strong returns of recent years won’t remain, they needn’t fear a complete selloff in the fixed-income markets. True, Federal Reserve policy and bonds’ strength have driven yields to historical lows—to near-zero territory for Treasuries, in fact. But there’s still plenty of bond-buying opportunity, the experts say.
“If interest rates rise, we’ll see a decline in bond prices but, over the long term, a rising rate environment is not a bad thing for people who are in it for income,” says Vanguard Chairman and CEO Bill McNabb in a market comment on the Vanguard Group’s website. “If you’re reinvesting part of the dividend, you’ll reinvest at a higher rate, and that will compound over time.”
McNabb acknowledges that the next 10 years of bond returns won’t be what the past 10 have been, when the broad bond market returned about 5% a year: “It’s almost mathematically impossible because yields currently are so low,” he says.
Yet bonds play an important role in a portfolio because they offer diversification, McNabb noted—with the proviso that yields are headed to a lower range. “Logically, with yields near historical lows, investors should have much more modest expectations for bond returns. I’m not saying to investors that they should abandon a sensible allocation to bonds. I’m just trying to help set realistic expectations.”
Similarly, Russel Kinnel, Morningstar’s director of mutual fund research, does his part to reassure bond investors, questioning the existence of the much-discussed “great rotation” in an analyst’s note.