March 3, 2009
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
This article is in response to a letter to the Editor, and follows up on our article last week, “The Case for the All-Bond Portfolio.”
Stock investors may not understand bond investing because it requires a different mindset. Bond and stock investors think about investing in different ways. Many bond investors are not total return investors. We do not plan to sell bonds because they have appreciated or depreciated. We do not consider market fluctuations particularly relevant, as long as the decline in value is not reflective of credit quality deterioration. We plan to hold our bonds until they come due.
We don’t advocate market timing in bonds. If we were to sell a bond at a gain because interest rates declined, taxes and transaction fees would be incurred. In addition, the investor’s funds would have to be reinvested at lower rates. Meanwhile, despite the decline in interest rates, investors are still earning the higher returns and cash flows that we locked in at the time we purchased the bonds. We consider selling bonds if there are other proposed uses for the funds: a tax advantage, more attractive market opportunities, or a decline in credit quality.
Stock investors may fail to grasp the nuances of the yield curve and the diversity available among bonds. Treasury bond 30-year yields are at a 3.5% today (2/25/2009). Investors are fleeing to safety and the liquidity provided by those bonds, despite their unattractive yields. However, other sectors of the bond market that look very attractive. Within the past few months, large institutions have been disgorging large blocks of muni bonds to raise cash, creating opportunities to buy these bonds at distressed prices.Display article as PDF for printing.
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