Today, there are more people invested in US bonds (of all types) and bond mutual funds and ETFs than ever before. The degree to which this shift from stocks to bonds occurred in the last few years is simply stunning. For the period from 2007-2011, ICI reports that a net total of $408 billion was redeemed from US equity mutual funds – that’s huge!
A record $792 billion in new money was invested in US bond funds in 2007-2011. While not all of the equity outflows immediately went into bond funds, this represents a shift of over $1 trillion in five years! A shift of this magnitude has never happened before. Is this a signal that the bull market in bonds is just about over? Could well be.
Today, we look at reasons why long-term interest rates could rise this year. While the Fed has promised to keep short-term rates near zero well into 2014, this doesn't mean that bond rates can't move higher this year. The US economy is improving, albeit very slowly, and inflation hit 2.9% in the 12 months ended in January, and the European debt crisis is far from over. These are not good signs for bonds.
Bonds have been a terrific investment for the last several years, but the bull market is now quite long in the tooth. If you are overweight in bonds, I would highly recommend that you take some profits and consider moving that money to an actively managed bond program such as Wellesley Investment Advisors with the potential to make money whether bonds go up or down (no guarantees of course).