Buffett Cautions Against Buying Long Term USD Bonds

Bill Gross Warning May Catch Bond Investors Off-Guard

When massive private and public sector debts result in a credit collapse and recession, the efforts to pare down the debt is deflationary.  Measures to inflate our way out of the situation are likely to fail as households are attempting to pay down debt and increase savings, rather than start a new round of debt accumulation.  In addition, financial institutions are willing to lend to only the strongest borrowers, another factor limiting credit expansion.  This is called a "liquidity trap" and is very difficult to extricate ourselves from. 

Regular readers know that "bond king" Bill Gross, who runs the world's biggest fixed income fund at PIMCO, is not the biggest fan of the Federal Reserve's quantitative easing programs.

Benjamin Mackovak submits:Typically my writings pertain to unloved stocks that are temporarily mispriced which I uncover through detailed fundamental analysis. If all goes accordingly the stock will appreciate toward its intrinsic value and the “mispricing” disappears while the investor realizes a return through capital gains. However in this missive I will focus on the less glamorous underbelly of the investing world; income investing.

MyPlanIQ submits:Last week painted a mixed picture for the fixed income market, with high yields and international inflation protected bonds again claiming the top two spots in our trend table. Long term government bonds and munis lagged the broader market. We think two major themes—durational risks of long term government bonds, inflation pressures in emerging markets—are in focus and would offer investors insights on how to navigate the bond market.

Chart showing corporate and government bond yields from 2005-2010 by Curious Cat Investing Economics Blog, Creative Commons Attribution, data from the Federal Reserve. Bond yields have dropped even lower over the last 6 months, dramatically so for treasury bonds.

My preference is for a lower use of bonds than the normal portfolio balancing strategies use. I just find the risks greater than the benefits. This preference increases as yields decline. Given the historically low interest rates we have been experiencing the last few years (and low yields even for close to a decade) I really believe bonds are not a good investment. Now for someone approaching or in retirement I do think some bonds are probably wise to balance the portfolio (or CDs). But I would limit maturities/duration to 2 or 3 years.

MyPlanIQ submits:Bond markets have been in a slump. Various bond ETFs stabilized a bit in the past quiet week. By examining the following trend score table for bond ETFs that represent various fixed income subclasses, one can gain some insights into the current fixed income world: