Shortening Sail

Is this the “big one?”

Mortgage rates are up, corporate bonds are yielding more, high-yield debt has spiked, even emerging bond markets have seen large capital outflows. Is this the “big one?” Are bond markets bracing for “bondmageddon,” a Lehman-like moment when everything goes to you-know-where and the markets trade down 30 to 50%?

Don’t count on it. Bonds aren’t equities. There’s a reason why they’re less volatile. Investors who hold individual issues can always hold them to maturity. If they do that, they may suffer lost opportunities, but they won’t see any nominal losses unless there’s a credit event—a default or missed payment. With the economy doing better, that’s less likely now.

Still, market losses from missed opportunities are real losses: the clearing price is lower. But by adjusting their strategy and letting bonds season, investors can limit the damage. Rising rates are like a strong gale to a sailboat. Sometimes you have to reef the mainsail to protect the mast.

Let’s just hope this storm blows over soon.

Douglas R. Tengdin, CFA

Chief Investment Officer

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