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Bond Risks and Duration

In March of 2012 I noted that some very prominent people were warning that the risk/return tradeoff in long-term bonds had become unattractive. There are plenty of commentators recommending that investors "don't fight the fed" and money has continued to flow into bond funds (although short-term bond funds were the most popular category of mutual funds - I suggested back in March short-term bonds should be safer than long term funds if rates rise). The yield on the 10-year Treasury note plunged to an all-time low of 1.404% in July, while The average yield on bonds rated below investment grade broke through the 6% barrier for the first time ever this week, falling to 5.90% on last Thursday. I continue to see public warnings of significant dangers in long term bonds, and the frequency seems to be increasing. The Wall Street Journal in particular has run numerous stories discussing the risks in bonds recently. Even though CNBC chose "The U.S. bond market is headed for a crash" as one if it's Predictions That Went Wrong in 2012, numerous prominent commentators on CNBC have been urging bond investors to exercise caution. The following is an updated listing of my collection of warnings.

"A reversion of risk premiums to historical averages of 6% nominal rates (3% real rates and 3% inflation) would suggest estimated losses in portfolios with bond durations of 5 years of 25% or more."
Robert Boroujerdi in Why Goldman Thinks You Should Dump Bonds Now (1/4/2013)
"many Wall Street experts think the bond bubble may be about to burst."
Hibah Yousuf (CNN) in Beware the bond bubble in 2013 (1/3/2013)
"Bonds of all stripes have gotten so expensive—and the yields, which move in the opposite direction of price, so low—that investors are almost guaranteed to be disappointed."
Ben Levisohn (at WSJ, who also called the bottom in junk bonds in early June) in Stocks, Not Bonds, May Be the Bet in 2013 (1/2/2013)
"Get out of all of your bond funds . . . stay away from bonds."
Ed Butowski via CNBC (12/24/2012)
"Yes, of course there is, it's been bubbled for several years and perhaps reaching its peak ... it's a bubble towards which the Fed is blowing lots of air"
Bill Gross in Fed's 'Hot Air' Will Keep Bond Bubble Aloft via CNBC (12/21/2012)
(although PIMCO's Tony Crescenzi disagrees 1/8/2013)
"In my bones, I just feel over the next three or four years, you are going to have significant negative returns in bonds."
Leon Cooperman via CNBC (12/19/2012)
"The biggest opportunity, and I don't think its an imminent opportunity, will be shorting the bond market"
Ray Dalio via CNBC (12/12/2012)
"Unless we begin to close this gap, then the inevitable result will be that our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow and the dollar would inevitably decline. Bonds would be burned to a crisp and stocks would certainly be singed; only gold and real assets would thrive within the 'Ring of Fire.'”
Bill Gross in Damages (10/2/2012)
Bonds are "Disgusting"
Jeremy Grantham via US Stocks are Expensive and Bonds are Disgusting (6/26/2012)
"Interest rates are now artificially low, and high-quality bond portfolios are unlikely to produce positive real returns."
Burton Malkiel in The Bogle Impact: A Roundtable (March/April 2012)
"Essentially, what we have right now in the Treasury market is a Ponzi scheme. If the market had its way, Treasury rates would be at least 100 basis points higher than they are today. But because there is a buyer out there who is willing to keep purchasing these securities, even though it doesn’t make any economic sense as a prudent investment, the market has reached levels that wouldn’t be sustainable if free market forces were allowed to prevail. The bottom line is Treasuries at current levels are exceptionally overvalued."
Scott Minerd in Winning the War in Europe (March 7, 2012)
"We suspect this will prove a lousy year for high-quality bonds"
James Paulsen in Economic and Market Perspective (Feb 2012)
"Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label."
Warren Buffett in Berkshire Hathaway Shareholders Letter (2/25/2012)
"I don’t think people understand how risky a US government bond is at 2% return."
Leon Cooperman has `No Interest' in Treasuries (2/22/2012)
"Though longer-term Treasury bonds were among the best performing asset categories last year, consider the risk taken. Who would be willing to buy them, at these absurdly low yields, unless they were able to sell quickly? I believe no one. It’s speculation since there is little, if any, underlying real value. Protect your capital and stay within a three-year maturity."
Bob Rodriquez in Caution: Danger Ahead (2/15/2012)
"We are literally running out of superlatives to describe how much we hate bonds. Yields are pitiful, dangers of even a slight recovery that could wreak havoc for long-duration portfolios loom, and monetary policies globally certainly have added to the specter of rising yields."
Jeremy Grantham in GMO Quarterly Update (1/31/2012)
“The bond outlook is extraordinarily bad”
Jeremy Siegel in Why stocks will beat bonds over the next 20 years (1/9/2012)

Some prior related discussions include the following.

More balanced discussions of whether we had a bond bubble (over a year ago) include the following.

Gary Karz, CFA Follow GKarz on Twitter
Host of InvestorHome
Founder, Proficient Investment Management, LLC

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