Jeffrey Kosnett, Kiplingers on the Bond Market

Last night I was clicking between the New Jersey Devils hockey game. Bloomberg stock market futures right up until about 930 at which time idea with the bad. New Jersey ended up winning that was the good news. The bad news is that the stock market is selling off but I will -- last night. The Dow futures are down about a 160 -- so when you are looked at the when you looked at the market last that I said oh boy. Funny this is going to be a bad day a gentleman Olympus and we're we're gonna have a rough day. In the stock market on Monday turning out nearly as bad not nearly as announced as we have originally anticipated the market down but. I I think what I see the the market and looking it different screens. What saving it like what's the what's pulling it back to. You know I mean a lot of uncertainty get those elections threatening austerity over there but. What is it. All -- -- some 3 o'clock consumer credit data report later on today I mean what's. Helping a you know. Just the that the year was greater than daisy I think maybe they've they felt like that the market initially felt that this LO was going to be. Much worse than anticipated. I was pretty pessimistic myself I was hoping that Sarkozy would get reelected -- to have some continuity. Yet the stock market doesn't seem to mind so would there would house the opening bell looking at this point. It's not too bad Dow futures only down 26 NASDAQ down five S&P -- three tenure US treasury yeah that's down one point 87 since Friday. Gold is down six dollars forty cents. And then boils down 85 cents we like this number it's 97 dollars and 63 cents a barrel -- well our next guest is Jeffrey -- that he say. Reporter at kiplinger's magazine rates. Frequently just terrific columns over -- -- Jeffrey welcome to the show are you doing today. I'm trying to -- it may -- Jeff. The the bull market for bonds has been going on an awful long time me it is a party over how long is the party been going on. Well party at the bull market and on and on on the 1980. And if you were allowed to say a prayer for something like the or any binding and there so -- wanna use something like vanguard long term treasury fund as a proxy. Mean I'm looking right now my screen and 101000 hours rest and that on. In 1986 is now worth 84. -- well on yeah rhetoric on. Full faith and credit so that's pretty good return him or -- 2% races. Are part of that of course are from the 1950s. And -- -- the early eighties interest rates bruise steadily as the united. Dominated the world economically and inflation eventually Europe and a couple times and -- so there was a huge germ. Air market -- on -- maybe these things around thirty or cycles in that case. Then the next big -- deterrent and interest rates. Ought to be it's hard to envision. There. But there's a a little bit of a change in more -- on to roll out do and that. -- -- OK let's let's talk like -- are -- of the opinion I mean the ten year treasuries at 187 I did talk to a bond trader the other day and he said well very. You know two hands bond went as low is it their tenure -- went as low as ninety basis points do you think that's a possibility here in the United States. -- our -- parent of 1% for ten years but there's a difference between bad. And the widely held assumption which I don't quite agree with that these are -- sort of sore. There's one thing. To say that agreeable more in interpret arms over where you can -- give a lot of big capital gains just sitting there waiting. It's something entirely different to your forecast the a negative air market and bonds word you would lose 203040%. Of -- capital I think that on rates can just sort of hang -- room they are now for awhile. We're out to march. Or reason to think go to war. I I worry that you know you -- because everybody saying rates are gonna go what Jeff I'm worried if they're going to innovate is somewhat of a contrary in part it if how does one protect themselves from rising interest rates was in their bond portfolio because I know there's been a ton of money. Flowing in too long term municipal bonds long term corporate bonds long term government bonds. Maybe maybe give our listeners a lesson on duration and the -- Its duration which is commonly to rest in years. Me is basically very rich in there and in this thing that you ought to do is curator of the year's treatment duration is a word that. The dictionary definition involves just think of and number. And if you see it in. That means that if the average interest rates in the on fund or the sector or whatever were your art Cabrera. Or one percentage point you would lose a percent of your value it's basically -- Rules com. A -- -- duration of any thing more sensitive it is to changes in interest rates well it means that when interest rates down number of better the subject on the table is these very -- -- likely to go out so. -- is or warning or an opportunity. You'll see a duration of -- -- 415. In matches where the two long risk. It is enormously greater and reward which is as were talking or one point 8%. -- you don't mean don't more term -- See you you're telling our listeners to avoid those investors but if you sell them. What are you buying instead Jeff played what's what's the replacement vehicle for a long term Muni fund your long term corporate or long term. Government bond on what do you use in its dead. They -- a shorter term and intermediate term corporate partners are DBB corporate sponsors. Placed the there and sweet spot. Municipal bonds of fires pressured to benefiting from that expansion. Who's very from many people is 3035%. Which is greatly. And you know more much more benefit and medium. You know the -- risk. To the principal. -- Even in high yield. Germs on your funds are over individual where say there's only five years left on bond so. Huge rate sensitivity to racial pretty low was that you it was still pretty hard. -- they've done very well. Arm the real risk is in very long term or governments and very long term anything that hasn't -- over march. How do you pick a good high yield -- -- is high yield as is John -- and and how does one make investments in that sector without. Running a lot of risk associated with default I didn't look at the unit default rates are down and as a matter of fact there's have been a lot of come -- lot of junk bonds that are getting. Upgrades in their memory in -- in their bond rating but. For EU was an advisor Jeff how would you recommend your readers avoid getting burned by a high yield issues at the. -- would go to one of agree you know French cleaners. -- world seniority or news tip -- show and mortgage -- And down and in look at various on and look at their durations but also look at. -- nature of the portfolio and it's more of a higher percentage that were polio. Is in the upper tiers of -- that would the or double -- bias the RBA. -- -- Those are the better bonds the ones through or later the funds that are heavily involved in known species the in unrated arms. In long durations stuff. And then issue pointed out you're correct and many arm more junk bonds have been upgraded to. Investment grade in the reverse. So there's a little bit of capital while. What frightens me your friendships are work work would turn me about high yield you -- that so much money. Is flooding into these farms and unlike -- treasury bond market which is a global market were in a foreign government insurance companies everybody -- them. Some are high yield bonds. Are mostly or retail market and most of them. Investing news on our mutual funds so they get overloaded with cash is just like. When they are as accurate or stock markets care. They might chase. Very good about you know Jeffrey thank you very in much for your time in and nice work on the article appreciate. Thank you recovery right Jeffrey cost that writer and reporter over to put your magazine joining us today on the financial exchange warning us that. Long term government bond fund may not be the least to have your money invested.