Bond Funds Becoming Increasingly Risky

“Davidson” submits:

This article shows why fixed income ($UST) is such a dangerous investment at this point in the business cycle. Losses can come very, very quickly once enough investors decide to shift funds out of fixed income for higher returns elsewhere.

The safest area for returns the next several years is equity ($SPY) even with the high volatility. As long as the global economy is improving, equities have historically gained favor in spite of volatility. This causes fixed income to sell off as investors chase returns and rates rise causing substantial losses for those who do not make the shift.

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Wipeout in Europe Bond Funds Tests Investors’ Resolve

Recent rout in government debt pummels funds’ strong start to the year

http://www.wsj.com/articles/wipeout-in-europe-bond-funds-test-investors-resolve-1432808571

A strong start to the year for many of Europe’s biggest bond funds was all but wiped out by an abrupt selloff in the region’s credit market, testing the mettle of investors who rely on the asset class for its steady returns.

Europe has been at the center of the global bond-market turmoil that began in mid-April. About €344 billion ($375 billion) was wiped off the value of eurozone-government bonds when prices fell abruptly after rising for several months to record levels, according to Bloomberg News’s index of eurozone sovereign bonds, which tracks the value of the bonds outstanding in the currency bloc.

“Fixed income had a great ride for a long time, but in the last few weeks we have lost a lot of money,” said Tanguy Le Saout, head of European fixed income atPioneer Investments.

Pioneer’s flagship €4.9 billion aggregate bond fund was up 3.1% in the first quarter, before losing much of that, according to data provided by fund-research firm Morningstar Inc. It was up 0.7% from the start of the year through Tuesday.

Investors say it isn’t clear exactly what triggered the selloff in government bonds. Most agree prices had climbed too far, too fast, as buyers swooped in to capitalize on the European Central Bank’s €60 billion-a-month bond-buying program, which was announced in January and began in early March.

 

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Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a RealMoney.com contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.