June 18, 2012
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Bond Investors Are Headed To a Massacre
You know, I hold a Fidelity corporate bond fund. Most of the bonds are B rated - some risk, higher returns, not quite junk.
The guy who runs the fund writes a yearly update. Last year he was asked about the outlook for fixed income and he mentioned the period of growth - bonds got cheap in 2009 but most didn't default, resulting in a lot of price appreciation - but he stated he thought it was over. When asked what was ahead, he said "Coupon-like returns from here on out."
That's hardly a massacre. If you don't like what rising yields do to your bond price: hold to maturity, collect your coupon, and get your capital back. Inflation adjustment - sure, it's worth looking at, but it's a notional figure - an inflation-adjusted gallon of gas 20 years ago sure doesn't buy me a gallon of gas today, for example.
The difference between the yield on B-rated bonds and that on Treasuries is hardly insignificant! My commentary was specifically on government bonds, but note that the post-1946 returns on corporate bonds was substantially the same as that on Treasuries. I should have gone into more detail regarding corporate bonds, but length limitations make it challenging -- perhaps that will be a follow-up article.