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July 8, 2013

Dimming Outlook for Bonds May Require Some Rethinking.

The above is the title of an article by Carla Fried. The article appeared in The New York Times, Sunday, July 7, 2013 Mutual Funds Report. 

Bonds, interest rate, yield, etc are topics appearing very frequently in the media. This article contains concise statements that may help understand what all the comments are about.  Following is a sampling from the article.

We have been hearing warnings about falling bond prices in the last few years. “…we got an early whiff of what may be ahead.”  During May the Federal Reserve considered reducing efforts to keep interest rates low.  The result was bond yields increased.  Bond prices dropped “…Because the prices of bonds fall as rates rise…”

Quoting Christopher Vincent at William Blair & Company “We’re at the change point where it’s no longer about making money, but preserving capital…”

The article also quoted Rick Ferri, founder of Portfolio Solutions.  “Who cares if you earn just 2 percent or even a small negative return over the short term when rates rise quickly?…Bonds …are an antidote to a falling stock market.  Remember what bonds are for…  When the stock markets are down 20 percent, 30 percent or 40 percent, a high-quality bond portfolio will keep from panicking.  And if you think cash is a better alternative, today’s measly savings or money market rates mean that you also get a negative return after factoring inflation.”  

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