Bond Buyers: Proceed With Caution

The economy may be improving, but there’s a new fear on the horizon for many investors: A bond market crash.

As reported March 10 by Investment News, the yield on the 10-year U.S. Treasury note is climbing after hitting an all-time low of 1.43% last summer. As bond prices move in the opposite direction of yields, the rise in market yields could translate into significant losses for investors – especially for investors in bond mutual funds in which portfolio managers would be forced to sell clients’ holdings at a loss to meet redemption demands.

“Bonds are a big problem, and most people don’t understand that yet,” said Harry Clark, chief executive of Clark Capital Management Inc., in the Investment News story. “The public thinks bonds are safe, but they’re not. They have no idea what’s about to happen to them.”

“Buyer beware. There’s a big yellow sign saying, “Caution ahead.’ It’s not going to be pleasant when rates go up,” added David Sherman, president of Cohanzick Management LLC.

The Financial Industry Regulatory Authority (FINRA) apparently echoes those sentiments. Last month, FINRA issued an investor alert on the vulnerability of bonds and bond funds.

“Currently, interest rates are hovering near historic lows. Many economists believe that interest rates are not likely to get much lower and will eventually rise. If that is true, then outstanding bonds, particularly those with a low interest rate and high duration may experience significant price drops as interest rates rise along the way. If you have money in a bond fund that holds primarily long-term bonds, expect the value of that fund to decline, perhaps significantly, when interest rates rise,” FINRA warned in the alert.