Tug of War in the Bond Market
by Marilyn Cohen
There’s an extreme tug of war taking place in the bond market: It is between the deficit doves and the deficit hawks.
You cannot be a bond investor today without letting politics creep into your decision-making psyche. Whether you are for continued spending or increased austerity, whether you vote for liberal candidates or more conservative ones, realize that Congress will not decide who wins this tug of war. The bond market will make the ultimate decision. The bond market will be the judge and jury, hangman and executioner, all rolled into one giant arbiter.
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As the Greek debt crisis went into full swing during May 2010, many television talking heads downplayed the suggestion that the United States is like Greece. After all, our economy is considerably larger and produces a much bigger variety of goods. Our real similarity with Greece, however, lies in our entitlements and in our continued practice of spending with abandon.
At the current spending rate, by 2030 United States public debt as a percentage of gross domestic product (GDP) will be 146%. Figure 1, which is taken from the Congressional Budget Office’s Long-Term Budget Outlook, shows that the outlook is not pretty.
You may be asking yourself, why and how has debt risen so much? Public debt is now double what it was over the past three decades. The largest of several 800-pound gorillas driving this debt is entitlement spending.
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Discussion
Excellent article. Hopefully we will not follow Japan with further decreases in the interest rates.
posted about 1 year ago by Louis from Florida
Great article, but please help me with the math related to the municipal bond. The table shows as interest rates rise the value of the municipal rises as well.
The value of the Municipal bond makes a big difference in the overall portfolio value.
Thanks and I look forward to an explanation.
JC in Tn.
posted about 1 year ago by J c from Tennessee
Very interesting article, but for those of us without the funds necessary to buy a balanced portfolio of individual bonds, is there a mutual fund alternative? Do any mutual funds invest in CIPS?
posted about 1 year ago by Judith from Utah
Will inflation and rising interest rates push bond prices down or not? You must answer the question in order to decide on a bond strategy..Like most things ,,,people act upon an uncertain future.
posted about 1 year ago by Larry from Florida
Very interesting article. Where can one find listing of available variable interest rates and CIPS ?
posted about 1 year ago by Ingemar from California
The spreadsheet included with our annual mutual fund guide lists the following inflation-protected bond funds: AmCent Inf-Adj Bond Inv (ACITX), AmCent Inflation Prot Bd Inv (APOIX), Fidelity Inflation-Protec Bd (FINPX)
PIMCO Real Ret D (PRRDX), Schwab Inflation Prot (SWRSX), T. Rowe Price Infl Pro Bd (PRIPX), TIAA-CREF InflLkRtl (TCILX) and Vanguard Infl-Prot Secs (VIPSX)
I have not looked at their individual portfolios, so I cannot tell you if they hold mostly TIPS or CIPS, however. The mutual fund guide is located at:
http://www.aaii.com/guides/article/top-mutual-fund-intro-2011
-Charles
posted about 1 year ago by Charles Rotblut from Illinois
Interesting article. None of the funds listed are predominately CIPS. TIPS seem to range from 77% to 100%, according to the sector data in free Morningstar. This took all of 6 minutes using google & MS accelerator keys.
posted about 1 year ago by James from Pennsylvania
I could not duplicate the green fields numbers in your spred sheet.
reg
posted about 1 year ago by Reginald from Georgia
For sort term bonds it seems that those that carry insurance would be highly attractive.
What percentage of municipal bonds carry insurance?
posted about 1 year ago by Bruce from Tennessee
Dont get your spreadsheet on bond duration.
How is the
posted about 1 year ago by Dom from Washington
oops, hit enter key...
How is the total cost different from the purchase price for each bond security? How are the value changes for each respective bond relative to the particular interest rate scenario, e.g. how exactly does the Big Blue bonds decline $5,484 w/ a 150 bps increase. I think formulas would help a lot here...
posted about 1 year ago by Dom from Washington
