Bonds, James Bonds
Bonds, James Bonds
Bonds, James Bonds
In 2015, the bond markets were at least “stirred” if not “shaken”… so what might be ahead?
While the roilings over global growth and the price of oil have dominated financial headlines in recent months, most of the bond market was likewise ebbing in 2015 and may become a “secret agent” in 2016, potentially being overshadowed by the stock market in 2016 even should it strengthen as the economic landscape continues to shift.
“OK, so with stocks off of late, bonds must be advancing, right?”…
Well, not exactly!
Higher yielding corporate bonds in 2015 were down some 4.6%1. According to Credit Suisse, last year was only the 5th down year for these bonds in the past 28 years.2
One reason the negative return years for bonds are so few? Total Return: for bonds, the majority of their return over time typically comes, not surprisingly, from the interest they earn. In addition, Total Return includes both this interest earnings component and the change – up or down – in the market prices of the bonds for any given period of time. So that means for the annual Total Return on bonds to be negative, the prices of bonds must decline by more than the interest earnings, or yield. As noted above, bond prices have only moved that far in a handful of years. Keep in mind as well: unlike many stocks, bonds have a “head start” each year on positive Total Returns, since they are, as a group, earning interest.
So how have bonds fared in years following past down years?
According to Credit Suisse once again, the down years of 1990, 1994, 2000 and 2008 were followed by 1 year returns ranging from 5.8% to 54.2% (that whopper year in 2009, the recovery year following the financial crisis of 2008). Over the 3 years following those 4 down years, high yield bonds posted average annual returns of 11.8% to 25.9%3.
That said, is past performance ever a guarantee of future results? Never ever. Are any two market cycles or psychologies the same? Not a chance. World events as yet unknown could most certainly lead to a different outcome for bonds over the next year and three.
Outlook Going Forward
“I have but one lamp by which my feet are guided; and that is the lamp of experience. I know of no way of judging the future but by the past” – Patrick Henry, March 23, 1775
History is, as it happens, all we have; it does lend some perspective to remind us that markets – of stocks as well as bonds – can and do overshoot to the upside as well as the downside, resulting in volatility.
As Thomas O’Reilly of Neuberger Berman noted on February 2nd, the “spreads”, or the additional yield from high yield bonds above that of US Treasuries is seldom above 8% (as it has been of late). He goes on to estimate that if the “default rate”, or percentage of high yield bonds that fall behind on interest payments, increases from its current rate of around 2% to as high as 5%, high yield bonds are still priced now to yield about 1½% more than they have historically averaged.4
As ever and always, we monitor both the markets and our clients’ portfolios, we counsel remaining diversified…
and most especially to be patient and persistent.
Think Spring and, as always, please do call us with any of your concerns… just know “007” is on the case!
1 “Are High Yield Bond Spreads High Enough?”, Thomas P. O’Reilly, Neuberger Berman
2,3,4 Market View, Lord Abbett, January 11 ,2016
Securities offered through 1st Global Capital Corp., Member FINRA/SIPC. Investment Management Solutions ("IMS") Platform fee-based asset management accounts are offered through 1st Global Advisors, Inc. All other financial planning offered through WealthCare Financial Group, LLC. WealthCare Financial Group, LLC and 1st Global Capital Corp. are unaffiliated entities. Insurance services offered through 1st Global Insurance Services, Inc.