Newspaper article St Louis Post-Dispatch (MO)

Making a Case for the Bond Bulls

Newspaper article St Louis Post-Dispatch (MO)

Making a Case for the Bond Bulls

Article excerpt

A common opinion, among investors seeking the most from their money, is that bonds are a waste of time. Over the long run, stocks have greatly outperformed bonds. So if you're investing for retirement in 15 or 20 years, why own bonds at all?

You may be about to find out. Over five-year periods, you don't know which type of asset will do the best - and for the average investor, five years is a long time indeed.

Furthermore, the focus on stocks since 1982 has obscured the extraordinary performance of bonds. America has recently lived through the greatest bull market of all time in both stocks and bonds.

Long-term U.S. Treasury bonds outdid stocks (as measured by the Standard & Poor's 500-stock average) in seven of the past 14 years, says Steve Leuthold of The Leuthold Group in Minneapolis. From 1982 to 1993, bonds just about kept up with stocks, although since then their gains have slowed.

Here's the case for bonds today:

(1) The rise in long-term interest rates earlier this year should slow t he economy down. That means less demand for borrowed money, hence lower interest rates.

When interest rates fall, the market value of bonds and bond mutual funds goes up. If the yield on long-term Treasuries drops by 1 percentage point (to 6 percent, from a bit over 7 percent today), you'd earn a total return of 21 percent over the next year, Leuthold says. (A bond's total return is the interest payment plus the gain or loss in market value.)

(2) If the economy slows, so will the rate of increase in business profits. While bonds go up, stock prices may go down.

Perhaps the stock market decline is essentially over (the Dow Jones industrial average has dropped 6.2 percent from its peak this year while the Nasdaq index of smaller stocks dropped 15.7 percent). But perhaps not - especially if the expected slowdown worsens into recession next year. If that happens, stocks will be a goner.

(3) If the forecast of a slowing economy turns out to be wrong, and business keeps barreling ahead, bonds present only a small risk. In a continuing strong economy, interest rates would go up, depressing the price of bonds. …

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