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Thoughts for Today's Bond Market

Preparing for rising interest rates.

John Rekenthaler, 11/27/2013

Parsing the Data
Morningstar's Markets Research group has assembled a PowerPoint presentation entitled Investing in a Rising-Interest-Rate Environment. (The link goes to Morningstar's Institutional Library, as the presentation isn't yet available to the general public.) The material sets the current bond market in context--what it means to be invested when interest rates are relatively low, and may soon be rising.

Key points:

1) Interest Rates Remain Unusually Low
You probably knew that. Still, the reminder may be helpful. As the 30-year Treasury yield is now at 3.8%, up sharply from its rate of 2.8% only six months ago, bondholders may be pardoned for thinking that rates have moved up to near-normal levels. That is not so. Since 1926, long Treasury yields have averaged 5.2%.

Similarly, intermediate government bonds are well below the historic mean of 4.5%. Treasury bills, of course, currently pay nothing, which is also atypical.

2) Long Bonds Remain Dangerous
That's also something you probably know--although to judge from the squawking about bond-market losses, some do not. Whereas intermediate-length Treasuries almost never shed 10% in total return during a bond-market sell-off, long Treasuries have done so a dozen times. Three of those 12 declines have occurred over the past five years--highlighting just how easy it is to lose money quickly during a low-rate environment.

3) High-Quality Corporates Look Relatively Cheap


Source: Morningstar.

is vice president of research for Morningstar.

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