Dear Ms. Yellen, I Don’t Care What You Do

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Fears of rising interest rates have become background radiation, exposing everyone. A recent Eaton Vance survey of 1,006 advisors concluded that, “nearly three-quarters of advisors report at least some concern about a near-term increase in rates, and one in five say they are very concerned.”

The distress runs so deep that some advisors call for completely abandoning bonds. At a recent investment conference in Manhattan, I witnessed a senior executive of a major real estate syndicator tell 1,000 advisors that he believes that investors should hold 0% of their portfolios in bonds. “I don’t see why they should hold any bonds,” he chirped to applause and laughter when answering a question of what percentages investors should hold in various assets. What should investors buy instead? REITs of course, he said. I won’t tell you which real estate syndicator he represents, but its underlying stock value is down 97% since that speech.

Later, in Denver, at an alternative investing conference sponsored by Financial Advisor magazine, the audience survived similar fusillades against bonds.

Even the venerable Barron’s ran a cover story with the warning “Trouble Ahead for Bond Funds.” The pull quote from the article read: “There is a real, real risk in bond funds.” In Advisor Perspectives, I read with surprise an article titled “Why Bond Funds Don’t Belong in Retirement Portfolios.”

Here is the investment-conference formula. The speaker directs the audience, “Raise your hand if you’ve survived a bear market in bonds.” The audience looks around bewildered; after all, the last bond bear market ended over 30 years ago. No one raises a hand. “Proof,” he booms, “this is what I am talking about folks – you have no idea what to expect in a bear market. Be warned, it’s not pretty.” Then he offers up as evidence investing your entire IRA in a 30-year Treasury bond the day before interest rates shoot up 4%. “In a flash 48% of your net worth instantly vanishes, forever–in a U.S. Treasury Bond! Do I have your attention yet?” The audience shrinks in horror.

My research challenges these hysterics. Rising interest rates are nothing to fear. Total returns will bepositive, not negative, if we have a similar rate trajectory that we had in the last bear market in bonds. Bonds should continue to be a staple in investors’ portfolios – and in greater, not lesser percentages as our population ages and interest rates increase.

Additionally, Blackrock found that from 1929-2014 stocks were negative in 24 years. In 92% of those years, bond returns were positive.

The numbers

The last secular bear market in bonds lasted from roughly 1950 to 1982. Let’s start with a picture – Figure 1. This is what a bear market in bonds looks like. A 5.58% average annual return for 32 years.


Figure 1 – Thomson US: Corp – High Yield – MF Index, 12/31/49-12/31/81, Hypothetical $10,000 investment.


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