"Commentary"-Bears & Bonds
Tuesday, June 26, 2007SUSIE GHARIB: Tonight's commentator has advice for investing in a bearish bond market. He's John Waggoner, mutual fund columnist for "USA Today."
JOHN WAGGONER, MUTUAL FUND COLUMNIST, USA TODAY: If you own a bond fund, you've leaned a lesson this year. The bond market, too, has bear markets. Fortunately, the fund industry offers several different ways to protect yourself when the bond market goes bad. A bear market in stocks is like being attacked by, well, a bear. It's a short, sharp attack on stock prices. A bond bear market is like being gnawed on by a poodle for a decade.
Bond prices fall when interest rates rise. Interest rates rose smartly this month, but they've been actually rising for some time now. For the record, the low in interest rates was four years ago in June 2003. The bellwether 10-year Treasury note yielded 3.1 percent. It's hovering around 5.1 percent now. Since that time, bond funds have earned an average 1.6 percent a year -- less than the average money market fund and less than inflation, for that matter. If rates continue to rise -- and they often do in multiyear cycles -- bond funds will continue to flag.
What's a mutual fund investor to do? You have a few alternatives. First, consider the humble money market fund. The average money fund yields 4.7 percent now and if the Federal Reserve raises short-term rates again, those yields will move higher. You might also consider an inflation-adjusted bond fund. These funds gain in value when inflation rises and inflation fears are one reason why interest rates are rising. If you invest in either type of fund, look for one with rock-bottom annual expenses, no more than half a percentage point for a money fund or three- quarters of a percentage point for a bond fund. It's bad enough feeding a bond bear. There's no reason to feed your fund company, too. I'm John Waggoner.
