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Bond Bubble Risk Is Still High - Alternative To Bonds

Thursday, August 18, 2011 - 11:07 AM
Allan Roth in his CBS MoneyWatch blog warns about the risk of the bond bubbles. Here's an example that Allan provided showing the risk:
My favorite bond fund, the Vanguard Total Bond Fund, yields only 2.46 percent but will decline by about 5.2 percent for every one percentage point increase in intermediate term rates. A three percent increase could take 15.6 percent of your money.
 
For the bond portion of one's portfolio, he prefers prefers long-term CDs with top rates and mild early withdrawal penalties. He has an early withdrawal yield table for both Ally Bank and Security Service Federal Credit Union. I mentioned both of these institutions in my CD recap last week.
1
Ken TuminKen Tumin5,468 posts since
Nov 29, 2009
Rep Points: 125,029
1. Thursday, August 18, 2011 - 8:21 PM
Vanguard itself has been warning about this since early this year, yet folks continue to pile into bond funds. Herd mentality? Partly. Inability to factor in "duration" when calculating risk? Partly. Yield-chasing? You betcha.

I think folks say "hey, if I plunk $10,000 into XXX bond fund, and they paid out $250 last month for every $10,000 invested, that's 3%/year" and that's the end of that. To make matters worse (or better, depending on your point of view), rates have continued to fall and fund share prices have further inflated, fueling the mania.

Rude surprise on the horizon?
2
BozoBozo137 posts since
Feb 14, 2011
Rep Points: 937
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