Changing Bond Markets

October 16, 2012

Bond markets, like stock markets, change over time. Bond market leadership rotates as interest rates rise and fall, as bonds with higher or lower credit quality gain market favor, and as global currencies fluctuate.  Looking back at the last seven years, we can see many shifts in bond market leadership.

High yields were often among the best and the worst performers. High yields produced the highest returns over this full seven-year period, but they also suffered steep double-digit losses in 2008, unlike any of the other bonds represented. High yield bonds have lower credit quality and carry a higher risk of default. In exchange for this higher risk, these bonds aim to produce higher returns – and in many years, they delivered. Treasury bills (T-bills), on the other hand, are considered among the safest area of fixed income because they’re backed by the U.S. government. While T-bills offer stability, the trade-off is lower growth potential.

NoLoad FundX’s model bond portfolio the Monthly Flexible Income Portfolio (MFIP) is also shown against these different areas of the bond market. MFIP can take advantage of these different kinds of bonds, but the portfolio also includes important risk controls, such as limiting exposure to riskier bond funds like high yields and emerging market bonds.

The MFIP adjusts to changing bond markets, and it made many changes over this time period. It moved out of high yields in 2008 and moved to a very defensive portfolio invested primarily in short- and intermediate-term funds and Treasuries. More recently, the portfolio has been well diversified, taking advantage of strength in both corporate and government bonds, short-and intermediate-term bonds,  high yields and also foreign bonds. This year, it has outperformed the Barclays Aggregate Bond Index, which is over 75% governments and agencies, with far less volatility.

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