From the Investment Department: Bond Market Outlook (8/30/13)

Investors have experienced a choppy, volatile bond market in 2013. For many bondholders this has led to negative total returns for the year.  For example, the AGG (or iShares Core Total US Bond Market ETF), which is widely seen as a proxy for the U.S. investment-grade bond market, is down -3.5% year to date.

We have had a defensive posture in our Lifestyle Income Bond (LIB) strategy since the beginning of the year, focusing on 1) keeping maturities short and 2) investing in high-yield bonds. We also entered 2013 with a floating rate fund that invests in bonds whose interest payments reset upward as interest rates rise. These moves have helped counter the down performance of bond funds, such as industry legend Bill Gross’s Pimco Total Return Fund (PTTRX), now down -3.5%; and the Pimco Real Return Fund (PRRIX), down -9.03%. Year to date, our LIB account is down -0.38%, net of the highest management fee charged, and is up 0.61% gross of fees.
 
While bonds will still provide an essential long-term anchor for many portfolios, we expect that the volatility and instability will most likely continue in the short term. At this time, it appears that the 10-Year Treasury Yield is heading towards a rate of 3.00%. Reaching that level will drive down bond prices still further.
 
With this outlook in mind, we still favor bonds with shorter maturities, as well as over-weighting high-yield individual bonds and floating rate bonds. For both our Foundation and our LIB models, we have also invested in the Pimco Credit Absolute Return Fund (PCARX), a more conservative fund that seeks to generate return in any market.
 
In addition, we are adding a stake in the Pimco Emerging Local Bond Fund (PELBX), as our ConVal^TM process has identified emerging market bonds as undervalued. Expect to hear more about our investments in emerging markets in an upcoming blog post!
 
If you have any further questions please feel free to contact your wealth advocate or our investment department.