Newspaper article St Louis Post-Dispatch (MO)

Investors Are Urged to Grasp the Short End of the Bond Market

Newspaper article St Louis Post-Dispatch (MO)

Investors Are Urged to Grasp the Short End of the Bond Market

Article excerpt

Don't go out on a limb in the bond market next year, some investors are saying. Notes with two or three years to maturity may fare better than longer-term notes and 30-year bonds in the months ahead.

"If you're going to be involved in the government bond market, you want to stay in the very short end," said Jeffrey Eglow, a money manager at Highlander Capital Management in Parsippany, N.J.

Longer-term securities such as 30-year bonds offer higher yields. Yet their total return, a figure that includes both reinvested interest and price gain or loss, may lag that of low-yielding Treasury bills next year, many investors say. Two-year notes, which yielded 0.55 percentage point less than bonds at 6.33 percent Thursday, may be a happy medium, said Jim Somers, who manages bonds at Martindale Andres & Co. in West Conshohocken, Pa. With two-year notes, "I can minimize my risk to principal and maximize my overall reward." This year, the two-year note provided a 4.8 percent total return, according to Ryan Labs Inc., a New York research company. One-year bills fared even better, providing a return of 5.4 percent. Bonds were losers, costing investors 1.34 percent. Those results surprised bullish money managers who last year wagered that longer-term securities would pay off in 1996. Longer-term securities carry greater "duration," a measure in years of an investment's sensitivity to interest-rate changes. A bond with greater duration will rally more if rates fall and post bigger price declines if rates rise. An alternative to buying two-year notes outright, Somers says, is to buy a mix of Treasury bills and 30-year bonds in a five-to-one ratio to duplicate the two-year's duration. "It doesn't pay, at this point, to cluster (fixed-income holdings) in the intermediates," said Somers. The so-called barbell trade ensures against a surge in rates and leaves a fund poised to benefit from a rally. …

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