Bond funds of doom

chihuaThe Treasury bond market has sold off sharply in recent weeks,  which means that bond investors must be huddled under bridges, trying to piece together the shattered pieces of their lives.

No?

The average intermediate-term government bond fund has fallen 0.18% this year, and 1.02% this past month, including reinvested interest. Most bond investors are probably not waking up and shouting “I’m ruined!”

Nevertheless, it’s alarming for investors, who have plunked down nearly $57 billion into bond funds this year, according to the Investment Company Institute, the funds’ trade group. Anyone who owned bonds during the financial meltdown — government bonds, that is — was glad to have them.

But the 10-year T-note yield has fallen from 15.84% in September 1981, making it one of the longest bull markets in history. Bond bear markets, unlike those in stocks, tend to be incremental, slow-motion disasters — a bit like being mauled by old, fat chihuahuas.

The bellwether 10-year Treasury note now yields 2.49%, up from 1.67% in February. The average 10-year T-note yield since 1962 — which is far as the data on Yahoo Finance goes — has been 6.43%. The median — half higher, half lower — is 6.11%. Either way, yields have a long way to go before they reach a relatively normal yield. And if history is any guide, markets typically overshoot on the way up and the way down.

A while ago, I suggested a no-bond portfolio for those worried about rising interest rates. Basically, you’d substitute money funds for bond funds in your portfolio. After all, the Fed is likely to raise short-term interest rates, which, in turn, could push bond yields higher as well. While the bond market could certainly settle down, it’s hard to argue that yields will stay this low for a long period of time.

Image courtesy of Angry Chihuahua meme generator. Somehow, I don’t think this one will go viral. 

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