The bond market has a serious PR problem: Nobody seems to believe there's much appeal in those securities.
And that's helping the stock market win more fans -- because if there's little or no attraction in bonds, the crown in that beauty contest often goes to stocks by default.
This should be of more than passing interest to baby boomer investors in particular. Somewhere between ages 50 and 60, investors typically are counseled to begin tilting their portfolios more toward bonds and away from stocks, to protect their capital.
Buy bonds today?
Why would you, when one of the smartest players in that market -- Bill Gross of Pacific Investment Management Co. in Newport Beach -- is holding 43% of the assets in his huge Pimco Total Return bond mutual fund in short-term money market instruments rather than in bonds?
That's certainly not a ringing vote of confidence in longer-term fixed-income securities.
Nor was a report last week from investment research firm Morningstar Inc., headlined "Just How Safe Is the Bond Market?" The conclusion was that investors who were used to thinking of bonds as a safe place to be ought to steel themselves for a potentially bumpy ride this year -- for example, if the housing market's woes cause more nervousness about mortgage-backed securities.
Anyone who has shopped for bonds recently can relate to the discomfort that Gross and Morningstar have with them. Bonds just don't pay much. Although the Federal Reserve has sharply raised short-term interest rates since 2003, longer-term rates haven't come up a lot since then.
The annualized interest yield on a 10-year Treasury note was 4.67% on Friday. The average corporate junk bond pays barely 7% a year.
Plenty has been written about why long-term interest rates are depressed. In the end, it must come down to too much money chasing too few bonds, worldwide.
Whatever the cause, if this is the hand you're dealt, what do you do with it?
Many Wall Street pros say you pass for now. You can earn nearly 4.9%, annualized, in a money market mutual fund, with virtually no risk to your principal. No wonder Bill Gross has so much of his bond fund in those cash accounts.
If you're looking to put money to work for the next decade or longer, some financial advisors suggest that you focus on stocks instead of bonds, even if retirement is on the horizon.
Wait a minute, you may be thinking. Aren't stocks far riskier than bonds?
