April 26, 2013 (PLANSPONSOR.com) – Bond investors could be living in a bubble, as profits from rising bond prices may be
obscuring the truth of less-than-zero yields on Treasury notes.
Investors may think their bond
investments are safe, even though inflation-adjusted yields on 10-year Treasury
notes have been less than zero since January 2012.
“Treasuries and other traditional
bonds are widely assumed to be ‘safe,’ but are just as subject as any other
fixed-income investment to losses in value should interest rates rise,” said
Nathan Rowader, director of investments and author of the study by Forward Management, “The 5% Problem: Double Jeopardy
for Bond Investors." The title of the study refers to
the 5% long-term average annual yield for U.S. government bonds from 1926 through
Rowader cited current market
conditions—low yields, moderate inflation and high public debt levels—which he
claims are almost identical to those of 1941, as evidence that bonds are
entering a bear market climate. While he does not expect to see the bond bubble
burst, Rowader said that they are likely to gradually “melt away” as returns from
traditional bonds erode and investors are unable to meet their investment
According to Forward’s study, a
rise in interest rates could cause investors to lose even more value in their
existing bond portfolios than they stand to gain in annual after-tax return. The
total return from a traditional government bond index averaged 8.8% annually
from 1981 through the end of 2012.
The report is available for