Most of our readers at the Motley Fool take more than a passing interest in their investments, keeping up to date on events hitting the financial markets. But for millions of Americans, the first clue of any signs of trouble in the markets will come shortly after the end of this month, as they get their quarterly brokerage and mutual fund account statements in the mail.
Inside those statements, there’ll be some bad news for investors. But it won’t come from the direction that most of them are expecting, especially if they’ve seen recent headlines about triple-digit moves in the stock market. Rather, what they’ll see will convince them that they’ve once again been had, and they’ll end up questioning their overall investment strategy as a result.
The big bad bond market
Investors have been taught that when they’re scared of stocks, they should buy bonds. The reason to do so is that ordinarily, bonds are less volatile than stocks and less prone to see dramatic drops in value. As a result, if you’re looking to reduce the overall ups and downs in your portfolio — especially as you approach and reach retirement age — then financial advisors will often point you toward buying bonds.
But these are anything but ordinary times. Massive bond purchases from the Federal Reserve at the rate of more than $1 trillion per year have arguably distorted the functioning of the bond market, and with the recent spike in bond yields after the Fed merely hinted at the eventuality of needing to reduce its purchasing program, evidence of that disruption appears clearer than ever.
Bond prices move in the opposite direction as yields. As a result, as you’re opening your brokerage statements in early July, you can expect to see troubling results like these:
The biggest bond fund in the market, the PIMCO Total Return Fund Institutional Class (MUTF:PTTRX), is on track to lose almost 5% this quarter — even taking the interest income that fund shareholders received into account. That comes despite the fund’s emphasis on short-term bonds, which usually move less abruptly than longer-dated bonds, but the greater volatility reflects moves that the fund takes to boost its leverage.
Index investors won’t see much better results. Vanguard Total Bond Market Index Fund Admiral Shares (MUTF:VBTLX) is down almost 4%, with its greater emphasis on Treasuries helping to offset the somewhat heavy concentration on bonds with maturities of 20 years or longer.
If you invest in some niche areas in bonds, expect a particularly harsh shock. iShares S&P Natnl AMT – Free Munpl Bd Fd (NYSEARCA:MUB) is down 8% so far this quarter, as tax-free bonds haven’t been any haven from rising interest rates. International bond funds have gotten hit even harder, with PowerShares Emerging Markets Sovere(ETF) (NYSEARCA:PCY) down 14% since the end of March as investors flee less-secure rising economies in favor of established markets.