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The Riskiest Time to Own Long Term Bonds

We believe that today could be the riskiest time ever to own long term bonds. Since the early 1980s, bond investors have been the primary beneficiaries of a trend that has been in the making for 30 years – declining interest rates. Long term bonds, such as the 10 Year Treasury Note, yielded more than 15% in 1981. As of the end of August 2012, the same bonds yield just over 1.5% (Source: Bloomberg). Long term bond investors were able to lock in relatively high interest rates during this period and watch those high coupon payments benefit their portfolios.

With yields on long term bonds hitting record lows this year, that trend may be coming to an end. The coupon payment on the 10 Year Treasury note issued in August is just 1.625%, so the potential for high returns in long term bonds is very low indeed (Source: U.S. Treasury). Another concern for bond investors is risk – investors have traditionally looked to bonds to help provide stability to their portfolios. It is possible that bond investors are faced with unusually high risk today.

To find out why bonds may be riskier today than they have been historically, let’s use the example of the 10 Year Treasury Note. The primary source of risk for this bond is an increase in bond yields, because rising bond yields cause bond prices to decline. For the 10 Year Note issued in August with a coupon payment of 1.625%, an increase in yield of just 1% higher than the coupon would result in a yield of 2.625% and a decline in price of over 8%. A loss that large would require over three years of earning the new, higher yield for the investor to break even.

Long term bonds were not always this risky. In the past, higher yields and coupon payments afforded investors much more wiggle room to recover quickly from price losses when yields rose. We looked at some of the 10 Year Treasury Notes that have been issued over the past 30 years and looked at the relationship between how much their prices would have fallen from a 1% rise in yields and how long it would take to recover that price decline. Today’s figure of over three years to recover losses is unprecedented. We believe that this could well be the riskiest time yet to be a long term bond investor.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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