Thursday, August 4, 2011

Bonds Offer Little Comfort


With many investors concerned about events in Washington and Europe, I have a number of discussions concerning whether it makes sense to reduce equity exposures in favor of bonds.

In some cases it might: if there is a need for cash in the next few months, or if the market's volatility is just too unsettling to deal with, selling down to the "sleeping point" (i.e. the level where you can sleep comfortably at night) might make sense.

However, in my opinion, the investment case for bonds is less appealing. Interest rates on U.S. Treasurys have moved to very low levels.

In fact, in this morning's trading, the yield on 1-month Treasury bills is now negative (meaning you'll get back less than you invest).

What about corporate bonds?

Here again, yields are at historically low levels. As yesterday's Bloomberg notes, corporate bond yields are now the lowest on record:

Investment-grade corporate bond yields fell to 3.51 percent yesterday, surpassing the previous all-time low of 3.53 percent set Nov. 4, Bank of America Merrill Lynch index data show.

http://www.bloomberg.com/news/2011-08-03/jpmorgan-plans-bond-offering-as-yields-fall-to-lowest-on-record.html

Finally, our bond area points out that municipal bond yields levels on maturities less than 5 years are now equal to the all-time lows reached in August 2010.

I could go on, but you get the point: The price for safety in today's market is extremely high.