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Friday, January 31, 2014

So much for the safety of bonds

Bonds had a lousy 2013.  Most investors think bonds are always safer than stocks, but it depends on what you are buying and the price you pay.  

Last year, the 1-3 year Treasury Bond ETF (SHY) generated a 0.23% return.  That's one-tenth of inflation.  

The 3-7 year Treasury Bond ETF (IEI) returned -1.95%.

The 7-10 year Treasury Bond ETF (IEF) returned -6.12%

The Treasury Inflation Protection Bond ETF (TIP) generated -8.65% return.

The 10-20 year Treasury Bond ETF (TLH) returned -8.48%.

The 20+ year Treasury Bond ETF (TLT) returned -13.91%.

Oh, by the way, the S&P 500 ETF (IVV) returned +32.31%.

What happened?  As has been long predicted, interest rates went up.  That's it.  When interest rates go up, bond prices go down.

When you buy bonds at high prices and low yield, you get return-less risk instead of risk-less return.

Bond yields are higher, but not high relative to history.  The bond bull market that began in the early 1980's saw yields in the teens.  Today long government bonds are yielding 2.6% to 3.6%.  I don't know which way they will go, but yields still have more room to go up than down.

Bonds are safe when they are priced to provide good returns, not at any price--just like stocks provide good returns when priced accordingly.

No financial instrument is inherently safe.  It depends on what you buy, and the price you pay.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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