Is Now the Time to Abandon Bonds?
While bonds are usually considered the safer investment alternative to stocks, one analyst believes that bonds could lose as much as 40% in value, and that retirees are the most at risk.
Bonds have been quite popular since the 2008 recession, as investors looked into the more traditionally safe market to avoid the deepest pitfalls of the economic downturn. With U.S. President-elect Donald Trump seen as a boon to the stock market, investors have begun aggressively reinvesting from the bond market into stocks.
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This is evidenced by the immediate shift in the market following the election. One trillion dollars left the global bond market just two days after President-elect Trump’s victory.
If this trend continues then many investors could suffer losses not seen since the Great Recession, only this time in “safe” bonds, according to Ric Edelman, executive chairman of Edelman Financial Services, LLC. (Source: “Opinion: Investors may lose 40% in ‘safe’ bonds — and retirees are most vulnerable,” MarketWatch, November 18, 2016.)
The reasoning behind this grim prediction is the inverse relationship between interest rates and bond prices. As interest rates fall, the bonds usually rise in price, and the opposite is true as well.
With interest rates expected to rise in the near future, this could create a perfect storm for investors who had put a lot of money into high-yield, long-term bonds. (Source: “Fed Says Case for Rate Hike Strengthened,” Trading Economics, November 23, 2016.)
“You could see 20%, 30%, 40% losses in the bond market over the next several years,” said Edelman. “and the people who are most exposed to it are retirees trying to live on their income. The people who are the least able to handle it financially are the ones most likely to suffer.” (Source: MarketWatch, November 18, 2016, op cit.)
Despite the promise of higher yearly payouts, Edelman ultimately warns against investment in these long maturity bonds, especially with all signs pointing toward interest rate hikes looming on the horizon. He also believes that emerging-market corporate debt is to be avoided.
While this is not guaranteeing the death of bond value, it’s certainly worth considering alternatives to a potentially shaky market going forward. Whether the stock market is the way to go, however, remains to be seen.
