miércoles, 2 de enero de 2013

miércoles, enero 02, 2013


December 31, 2012

Bond Craze Could Run Its Course in New Year

By NATHANIEL POPPER
 
 
 

The big story in the markets this year was not about stocks.
 
       
Americans sold off their stock mutual funds, the most popular way to invest in American companies, at the fastest clip since 2008, the year the financial crisis began. That occurred despite the fact that the stock market itself rose steadily; the benchmark Standard & Poor’s 500-stock index ended the year up 13.4 percent.
 
      
Investors have been opting instead for the assumed safety of bonds. Money has been steadily flowing into mutual funds holding bonds of all sorts for the last four years, but the pace accelerated this year. The percentage of household investments in bonds shot up to 26 percent from 14 percent just five years ago, according to Morningstar.
 
      
Entering the new year, a growing number of professional investors are betting that the craze for bonds has gone too far, perhaps dangerously so, as has been evident in the headlines from the year-end reports from large investment firms. Bond PAIN in 2013?Wells Capital Management’s chief strategist asked. “Caution: Turn Ahead,” BlackRock analysts wrote. “The inflection year,” said Bank of America.
 
      
This is not the first time that analysts have forecast an end to the rally in bond values that has lasted for decades. But previously many of the voices predicting it were pessimists who believed that investors would sell off their bonds when they lost faith in the American government’s ability to pay back its bonds, forcing the government and many other bond issuers to pay higher interest rates. When interest rates rise, older bonds with lower interest rates are worth less.
 
      
While those previous forecasts have proved expensively wrong, this year the forecasters are being joined by many economic optimists who argue that a strengthening American economy is likely to make investors willing to embrace the risks involved in stocks, luring them out of bonds. The question, they say, is only how quickly it will happen.
 
      
Mathematically, it’s next to impossible to get the kind of returns on bonds you’ve seen over the last few years,” said Kate Moore, the chief global equity strategist at Bank of America.
 
      
When the turn does ultimately come, it is likely to cause pain for at least some of the people who have been investing in bonds in recent years.
 
      
“You don’t want to be the last one out the door when the trends turn,” said Rebecca H. Patterson, the chief investment strategist at Bessemer Trust. All good things come to an end and we want to make sure we’re in front of it.”
 
      
Most of the talk of investors shifting money from bonds into stocks relies first on the assumption that politicians in Washington are able to resolve the current impasse over the so-called fiscal cliff, the automatic spending cuts and tax increases that will go into effect if Congress and President Obama do not come to an agreement, and the coming debate over the nation’s debt ceiling. (Late Monday evening, the two sides crept closer to a deal, tentatively agreeing to raise taxes on incomes above $400,000.)
 
      
But a number of surveys suggest that professional investors are already starting to prepare for a shift. Hedge funds polled by Bank of America said that they had more of their portfolio allocated to stocks than at any time since 2006.
 
      
All but one of the 13 bank strategists tracked by Birinyi Associates expects stock markets to rise in 2013. When 2012 began, the same strategists were predicting a downturn in share prices. Even among mutual fund investors, there are signs that the flows out of stocks and into bonds have been slowing down recently.
 
      
The preference for bonds has already been costly for retail investors. Over the last year, most types of American bonds have returned less than an investment in the S.& P. 500. When inflation is factored in, the benchmark 10-year Treasury security is delivering negative returns.
 
      
But many investors are still rattled by the 2008 financial crisis and the turbulence in the stock markets since then, which have led to wild swings. Over the last five years, all major types of American bonds have done better than leading stock indexes.
 
 
      
The Federal Reserve has been engaged in an aggressive effort to buy bonds and drive down interest rates. The long term goal of that program is to encourage banks to lend money and to drive investors out of bonds. But in the meantime, falling interest rates have made bonds more attractive. The Fed has said it wants to keep rates low until 2015, though it could let them rise sooner if the economy picks up faster than expected. The 10-year Treasury hovered near 4 percent in recent years but has stayed below 2 percent for much of 2012.
 
 
      
A number of big-name investors say they believe that the low rates and economic uncertainty are likely to endure, giving bonds a continuing attraction. William H. Gross, the co-founder of Pimco, and perhaps the world’s most famous bond investor, said on Twitter that he expected interest rates would fall further in 2013, in part because of continuing growing pains in the American economy.
 
 
       
Mr. Gross’s prediction is particularly notable because in 2011 he bet that interest rates would rise, leading him to sell off some of his firm’s Treasury bond holdings. When that bet lost money, Mr. Gross reversed course.
 
 
      
Garth Friesen, the chief investment officer at the hedge fund manager AVM, compared the current situation in the United States to the last few decades in Japan, where investors have continually predicted that interest rates will rise and drive down the value of Japanese bonds. Almost all of those predictions proved wrong as slow economic growth continued to push Japanese interest rates down.


 
More money has been lost trying to predict the rotation out of Japanese bonds than almost anywhere else,” said Mr. Friesen.
 
      
But Mr. Friesen says he does believe that the returns from bonds will be lower than they have been in recent years. A Bank of America global bond index has returned 6 percent over the last year, 17 percent over the last three years and 32 percent since 2007.
 
 
      
Most of the predictions that interest rates will stabilize or turn around are based on the belief that an improving American economy will help push unemployment lower, restore confidence in American companies and encourage inflation to start to rise. If inflation does go up, it will make current bond holdings less attractive.
 
 
      
There is growing evidence this is already happening. In addition to the rising stock market, housing prices have begun to move up and unemployment has been trending down.
 
 
      
Ms. Patterson said that this shift was likely to occur slowly, giving investors time to sell off their bond investments without sustaining any significant losses. What is more, a turn in interest rates will not cause the same problems for all bond holders.
 
 
      
Investors who hold bonds directly will continue to collect regular interest payments and will receive back their entire initial investment, the principal, when the terms of the bonds expire. But for people who frequently buy and sell bonds, including mutual funds, the value of the bonds they currently hold will go down when interest rates rise.
 
 
      
Even among bond mutual funds, some types are expected to continue to do well if and when interest rates rise. Bonds that are issued to provide loans to banks generally do well when rates rise. Among corporate bonds, investments in high-yielding speculative companiesso-called junk bondsgenerally do better in times of rising rates than bonds issued by companies with high credit ratings.
 
 
      
But all of this calculus could be thrown on its head if the doomsayers are right and interest rates rise quickly at some point. That could happen if, say, there were serious military tensions in the Middle East and oil prices spiked suddenly. It could also occur if investors lose faith in the ability of the United States government to pay back investors who buy its bonds.
 
 
      
Tad Rivelle, the head of bond investing at TCW, said that the Federal Reserve’s current policy was most likely to fail and kill confidence in Treasury bonds, forcing the government to pay higher interest rates to borrow. But even if the Fed succeeds, Mr. Rivelle said, interest rates will end up in the same place.
 
 
      
“Whether Fed policy succeeds or fails, rates are ultimately going to be going significantly higher,” said Mr. Rivelle.       

0 comments:

Publicar un comentario