The popular investment narrative of market pundits for 2014 was to be overweight equities. Thus far, things have not gone according to plan. In fact, bonds have actually done better than stocks since the start of the year. This was supposed to be a bad time for bonds, but you would be hard-pressed to find any signs of a panic trade. It may be early days, but if this persists, we may be looking at the great “unrotation” rather than the “great rotation” that so many speculators had predicted.
There are a few reasons for this, some of them basic. One is that investors need bonds to anchor their portfolio. People own bonds because they provide an income.
Remember the critical difference between a dbond and a stock. With a bond, you are lending money and the company has an obligation to repay you. With a stock, you are buying a share of future profits. The latter is a much riskier bet.
So this need for income is one part of the bond story. The other part is diversification. If equities come under pressure, you naturally should expect government bonds to do better by comparison. A balanced portfolio means you're never left in a circumstance where all of your assets are going in the same direction at once.
Bond investors essentially have two enemies: one is rising interest rates, the other is inflation. Watching over your shoulder for those enemies should be on the checklist of anyone in receipt of a fixed income.
So how does the dashboard look? The potential for rising interest rates is, of course, inevitable, but we think any action is later rather than soon. Thankfully, the U.S. economy is growing at a stronger rate than it has in the years since the financial crisis, but gros
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