Bond funds could be on borrowed time

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CHICAGO (MarketWatch) — In a world where financial rescues dominate headlines, U.S. government bond funds played hero yet again, rescuing portfolios in a tough second quarter.

Sound familiar? Analysts have been pegging the end of the decades-long (and surely stretched?) Treasury rally ad nauseam. But Europe’s festering credit crisis, weakening Chinese economic growth, and a bumpy U.S. recovery combine to pressure the Federal Reserve and its counterparts to hold interest rates at extraordinarily low levels.

At least, that’s what the central banks tell us. Those banks are proving to be steady Treasury customers, sticking to longer-term debt purchases to depress longer-term interest rates.

Central bank demand, and that of investors looking for shelter at any cost from global volatility, has plumped up bond fund returns. Long-term bond funds rose 3.4% for the 13 weeks through June, according to preliminary data from investment researcher Morningstar, Inc. They’re up some 13.5% over the past year.

Long government funds clobbered all fixed-income categories in the period, up 10.3% and 35.6% over the past year. The gain compares to quarterly losses of some 3%-6% for midcap and large-cap stock funds of varying styles. Meanwhile, short- and intermediate-dated government bond funds rose 0.5% and 1.6%, respectively, in the quarter. Read more: It’s ‘duck’ season for U.S. stock fund investors.

For much of the world, Treasury’s are a lifeline that’s filling an insurance role in portfolios, but it’s an expensive policy. And it’s too rich as a pure investment play just now, said Steve Walsh, chief investment officer of Western Asset Management Co. Walsh spoke during a Morningstar Investment Conference panel in late June.

But should investors fight the Fed?

“It’s a tough conversation. Most see only the old world [of fixed-income investing] where rates go lower and total return goes up when equities are down,” said Jeffrey Rosenberg, chief investment strategist for fixed income at BlackRock Inc.

“There’s some complacency setting in, the thought that, I’ll do what I’ve always done and be rewarded for it. You have ask, how much longer can this way of investing continue to deliver the way that it has delivered in the past?” Rosenberg added. “We’ve not had in 40-50 years interest rates across the curve that are below the inflation rate.

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Godwin Okafor is a Financial Journalist, Internet Social Entrepreneur and Founder of Naija247news Media Limited. He has over 16 years experience in financial journalism. His experience cuts across traditional and digital media. He started his journalism career at Business Day, Nigeria and founded Naija247news Media in 2010. Godwin holds a Bachelors degree in Industrial Relations and Personnel Management from the Lagos State University, Ojo, Lagos. He is an alumni of Lagos Business School and a Fellow of the University of Pennsylvania (Wharton Seminar for Business Journalists). Over the years, he has won a number of journalism awards. Godwin is the chairman of Emmerich Resources Limited, the publisher of Naija247news.

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