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Deflation and Stock and Bond Returns

Overview: With expected inflation rates very low, there will be significant attention on the possibility of deflation causing the stock market to fall. This blog examines the relationship between the rate of inflation and stock and bond returns. Generally, the research shows that stock returns are no lower in deflationary environments than in normal inflationary ones. The research does find, though, that both stocks and bonds have done poorly in high-inflation environments.


Are Some Bond Fund Prices Stale?

I have long been skeptical of how fair bond fund prices are — or more accurately said, the potential ability for knowledgeable investors to “game” bond fund prices — in fixed income asset classes where liquidity isn’t great. Two asset classes that immediately come to mind are municipal bonds and high-yield corporate bonds. I finally got around to testing this proposition using daily returns data for a handful of different bond funds in these two asset classes. The findings confirm my suspicion.

Do Corporate Bonds Add Value in Portfolios?

I frequently get asked about the merits of corporate bonds, both investment-grade (IG) and high-yield (HY), relative to government and municipal bonds. I don’t believe the risk-return profile for long-term investors (particularly taxable individual investors) is improved by owning IG or HY corporate bonds compared with simply owning a diversified portfolio of stocks and high-quality government bonds.

The key here is to understand that corporate bonds are essentially nothing more than a ....

Bond Funds Aren’t Naturally Riskier Than Individual Bonds
In spending significant time talking to clients and wealth advisors about fixed income, one common misconception is that bond funds are more exposed to interest rate risk than laddered individual bond portfolios. The logic basically starts and ends with the observation that individual bonds can be held to maturity while bond funds don’t necessarily hold all bonds until they mature. Because all individual bonds can be held to maturity, as the logic goes, it doesn’t matter if their prices go up or down in the interim. ....
Positive Developments for Municipal Bond Investors
Public pension underfunding at the state and local level has rightly received an enormous amount of attention over the past few years. Most public pension funds are significantly underfunded when pension liabilities are valued using economically reasonable assumptions. In fact, Moody’s has calculated total underfunding to be roughly $1.8 trillion as of 2011, meaning the total value of pension fund assets is roughly $1.8 trillion less than the amount these funds owe to current and future retirees. From a municipal bon....
Video Blog on Understanding the Current Fixed Income Market

In this video blog, I look at what are some reasonable expectations from the fixed income market given where rates are.

Why Rate Increases Are Almost Certainly Good News for Investors
Interest rates have been so low for so long that rate increases in 2013 have no doubt surprised some investors. Per the Treasury's site, the five-year Treasury rate went from 0.76 percent at the start of the year to 1.63 percent through August 19, and the 10-year Treasury rate increased from 1.86 percent to 2.88 percent over this period. These rate increases have prod....
Municipal Bond Fund Investors Are (Unfortunately) Selling Again

Over the past week, I’ve been reading a few pieces summarizing Detroit’s Chapter 9 bankruptcy filing. One piece noted the absolutely massive amount of outflows from municipal bond funds in June and July. In June, the Investment Company Institute (ICI) reported outflows of $16 billion, which is the largest monthly outflow ICI has recorded in the dataset I’m using. Further, ICI reports that to....

What Are Fixed Income Markets Now Telling Us?

Fixed income markets have experienced a fairly substantial shift in 2013. In particular, we’ve seen a strong shift since Federal Reserve Chairman Ben Bernanke indicated that the Fed might tighten monetary policy earlier than originally expected. I thought it would be worth examining what fixed income markets were projecting at the end of 2012 relative to what they’re projecting now. While acting on personal (or expert) predictions of market movements usually leads to trouble, I think it can be useful to understand what....

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