Investing: Buy bonds now? It depends | Economic news
I insist that it is madness to abandon sound investments because of a bad quarter, but the early 2022 bond market slump is testing my resolve. When great things like tax-exempt toll highway bonds, taxable infrastructure municipalities, and BBB companies suffer losses of 6% to 10%, it’s a real shock and awe.
The last time yields took a hit was the ‘tantrum’ of summer 2013 when, despite no inflation, traders overreacted to Federal Reserve plans aimed at reducing bond purchases. This episode is now remembered as an epic buying opportunity. Thus, it is tempting to interpret the current slowdown in the same way.
With inflation high, there won’t be another raging bull market until then. But bond specialists are betting that parts of the bond universe will stabilize or recover somewhat.
Jason Brady, CEO of Thornburg Investment Management, says he’s starting to seize on interest rate-sensitive IOUs. “I can buy investment-grade solid credit at 4% that not too long ago was 1%,” he reasoned. Megan Horneman, Chief Investment Officer of Verdance Capital, said, “I don’t think we will accept these types of losses in the coming quarters.” She said bonds remain “contested” but urges investors to “remember why you are buying fixed income”.
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Why do you buy bonds and bond-like investments? Your answer should indicate what you will do next. If you’re using bonds for growth in addition to income, you may find it’s too early to buy, although it certainly seems too late to sell.
If cash flow and diversification dominate, consider some opportunities. It’s smart to slip into disadvantaged investments when the results are still poor, but the outlook isn’t as dire as it used to be. Here’s why: Inflation may be lower than you think. The bond market pegs year-end inflation well below the headlines in the consumer price index. The Federal Reserve Bank of Atlanta’s Inflation Project pegs the 2022 balance sheet at 4.5%. This alleviates fears that inflation will drive interest rates back to 1980s levels and further crush bond yields.
Higher coupon rates on new issues and lower bond prices provide better entry points. Municipalities were expensive at the end of last year, yielding less than 70% of the yield of Treasuries. Now the ratio is 93% for 10-year maturities and 104% for 30-year tax-exempt, which is a good precursor for munis to outperform over the next few months. The yield advantage of corporate bonds and mortgage-backed securities over Treasuries is also widening. People are still buying homes, but they’re no longer able to refinance, ideal conditions if you’re investing in mortgage bonds.
Individual links are unscathed. If you own a collection or ladder of single bonds, daily market prices are irrelevant. Instead, you may find that if you get the principal back when it matures, you can reinvest it at a better rate than you imagined. There are few defaults and once risky debtors such as oil drillers and commercial real estate companies are profiting from inflation in energy prices and rents. People are paying their car loans, their mortgages, and their credit card bills. If your priority as an investor is getting your money, it’s always wise to be a lender.
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