All the recent bond-buying is likely to end badly: "We don't see [bond interest] rates rising in the first half of the year, but, when they move higher, the move could be swift," warns Michael A. Galantino, managing director at Boenning & Scattergood in West Conshohocken. Boenning is warning clients that a 2% jump in interest rates is likely to knock more than 15% off the trading price of existing US Treasury 10-year debt, forcing funds to mark down a broad range of debt asset values.
Even with the year's stock market rebound, bond funds are flush with nervous investors' cash: "The most recent mutual-fund flows are astounding," Galantino told me. In 2012, "stock funds have seen [net] withdrawals of over $100 billion in assets, while bond funds have attracted over $300 billion. People are reaching for yield like never before." Boenning led nearly 100 Pennsylvania municipal bond deals in 2012, with mutual fund managers and other institutions buying up much of the issuance, Galantino notes. So there's a lot of potentially vulnerable muni as well as government and corporate paper out there.
Which means "it's time to be cautious," he concludes. Boenning has recommended clients "significantly reduce" average bond maturity in their portfolios, from the recent average of 15-18 years, to the 5-7 year range. "Our clients sacrifice short-term income for more downside protection and significantly reduced volatility," Galantino said. "We continue to focus on attractive bank preferred stocks, high quality dividend-paying commmon stocks" (for companies with "strong balance sheets and respencted management," and covered-call options on dividend-paying stocks. So there's at least some cash flowing back home.