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LeTort Trust is an Independent Trust Company with a single focus of providing personalized financial solutions to individuals, businesses and institutions. As an Independent Trust Company, we are held to the highest standards of fiduciary accountability in the industry. Our clients depend on the prudence and expert guidance we provide through our customized wealth management and retirement plan services.


Fixed Income and the Bond Market…What’s Next?

Since the recent Financial Crisis, Fixed Income securities of all types have been the asset class of choice of fearful investors rattled by painful drops in equity prices.  On January 31st, the 15-year annualized return for the Barclays Aggregate Bond Index, the most commonly used proxy for the US investment grade bond market, was 5.82% per year versus 4.75% for stocks as measured by the S&P 500.  Over the same 15-year period, 10 & 30 year Treasury Bonds earned 6.59% and 7.50% per annum respectively. Figure 1 shows how the 15-year annualized return for these assets has moved over time and where it sits as of January 31st 2013.  Said differently, since 1998 investors in 30-year Treasury Bonds have tripled their money while stock investors have only seen their money double after two recessions and excessive volatility.

Rolling_Returns smaller

Figure 1  Source: Bloomberg

This bull market in bonds is not new.  It is three decades and four recessions in the making as interest rates have dropped consistently from roughly 15% in the early 80’s to under 2% today.(Figure 2).  This pattern can’t continue and losses associated with rising interest rates could be equal or more painful than the exuberance felt from gains realized as the rates came down. The trajectory and timing of rising interest rates over the next decade is open for endless debate.  What is not debatable is the inverse relationship rising yields have with bond prices and the fact that returns over the subsequent decade can’t repeat.  

Rates revised

Figure 2  Source: Bloomberg

With improving U.S. economic conditions, strong equity market returns and almost 4 years removed from an end to the recession, the financial media has begun to highlight the risks of rising rates for bond investors.  FINRA, The Financial Industry Regulatory Authority and largest independent regulator for securities firms, issued an alert on the affect of rising rates on bond portfolios.  Pimco, the worlds’ leading bond manager, is setting expectations for 10-Year Treasuries to return between 2%-3% per year over the next 5 to 10 years.  I assure you that nobody has clarity as to the near term movements of interest rates, but we can feel confident that they will not replicate what we have seen over the last few decades.  Even under the most optimistic scenarios, we are looking down the barrel of a mathematically certain future of poor to negative inflation adjusted returns for the asset class. 

Despite this poor long term outlook for bonds, it would be foolish to overlook the benefits that fixed income assets provide to a long term, risk-averse investor. Bonds may not be poised to provide stock like returns as they have, but they do continue to serve as a valuable counter balance to equities.  Historically, stocks and bond prices have not moved in lockstep, providing downside protection for inevitable corrections in equity markets as well as a stable source of cash flow.  In addition, bonds are less volatile than stocks, providing roughly 1/3 of the price volatility with a small yet contractual income component.

Without an appropriate allocation in your portfolio, you are at the mercy of the stock market with no safeguard to provide offsets to short and long term liabilities. Of course, fiduciaries must revisit the amount of interest rate risk within client portfolios and make adjustments to mitigate the potential damage, but this must be balanced with the benefits.

The U.S and the Euro zone countries continue to struggle with looming fiscal imbalances, disruptively high unemployment, and a lack of political leadership.   As short sighted speculators have become less averse to the risks associated with stocks of late, we still have most of the same structural headwinds to a healthy pro-growth environment in the U.S. and abroad.  Fixed Income will always have a place in your portfolio to diversify and reduce volatility.  We just need to temper our return expectations going forward and not discount their stabilizing affects on balanced portfolios.


Dan W. Eichelberger, C.F. P – Chief Investment Officer

LeTort Trust