Advisers warn bond rally may be over
As the Dow Jones industrial average hit a record high Tuesday, some investment advisers warned that a long rally in the bond market may be near its end.
The Dow closed at 14,253.77 Tuesday, surpassing its previous high in 2007. After the stock market crashed in 2008 during the financial crisis, investors pulled money out of equities and poured money into less risky U.S. bonds.
"The market hasn't gone anywhere roughly in five years if you're looking at the Dow, and obviously if you invested in bonds, you'd be doing better," said Keith Lanton, president of Lantern Investments Inc., a Melville-based financial adviser. "I would not expect that to continue."
Over the past five years, investment-grade bonds and junk bonds have earned greater returns than stocks, based on a comparison of total return indexes.
Since March 4, 2008, the FINRA/Bloomberg Active Investment Grade U.S. corporate bond and high yield total return indexes gained 37.7 percent and 57 percent respectively. Total return indexes for the Standard & Poor's 500 gained 27.8 percent, and the Dow Jones gained 34.1 percent.
Investors in fixed-rate bonds receive a steady stream of income in the form of an interest payment. Inflation can decrease the value of that income stream, and rising interest rates can reduce the value of the bond if the investor wants to sell it.
The return on the bond is described in terms of yield, which is derived from the interest rate and the cost of the security. Federal interest rates are near zero, and investors expect them to go up as the economy recovers.
Joan Lappin, chairman and chief investment officer of Gramercy Capital Management Corp. in Manhattan, said that for the past 30 years bonds have been a good investment as falling interest rates increased their value.
"When bond yields start to rise you're going to get your clock cleaned," Lappin said. "It isn't a question of if you will get your clock cleaned, it's only a question of when."