This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

The Next Bubble to Burst: Bonds

Editor's note: As part of our partnership with Nightly Business Report, TheStreet's Lindsey Bell joined NBR Monday (watch video and read transcript here) to discuss why the 30-year bull market in bonds might be coming to an end.

NEW YORK ( TheStreet) -- Investing in bonds has proven to be a home run for 30 years, but the bubble is primed to pop.

The BarCap U.S. Government Aggregate Treasury Index has had an average annual return of 8.5% over three decades. Bonds' gains accelerated during the Great Recession, performance that attracted inflows. In fact, since April of last year, new money flowing into bond funds has far outpaced that of equity funds.

Going back further, bonds have benefited from the tailwind of falling interest rates since the Reagan administration in the 1980s. With yields on the benchmark Treasury bond now near record lows -- around 2% -- any increase will spell losses for investors.

Word on the Street

As soon as the Federal Reserve begins raising interest rates, even by a small amount, investors run the risk of losing money. Longer-dated bonds will fare the worst. For example, a study by United Capital shows that the price of a 30-year Treasury bond will fall by 20% given an increase of 1% in interest rates.

Investors have taken advantage of improved bond returns by buying bond funds and ETFs. These are very different creatures. Bond mutual funds act more like stocks than bonds in that they don't have a maturity date or guarantee of a return of principal. Ron Weiner, CEO of RDM Financial, says the "share" price of the bond fund will fluctuate based on two things: the quality of bonds and interest rates.

Rising interest rates will have a particularly negative impact on these funds because managers must continually trade bonds to keep the fund alive since the funds don't mature. Therefore, principals will decline, hurting returns. Not helping matters is that managers will buy lower-yielding issues as high-yielding bonds mature.

Weiner explains that most of the returns in bond funds over the past few years have come from capital appreciation as prices went up on declining yields. A much smaller portion has been related to the return from interest rates.

Protecting against interest rate risk will be important for investors going forward. It's important to understand that bonds aren't 100% risk-free and must also be actively managed. While certain bonds and bond funds are riskier asset classes to own today, there are ways you can invest in bonds and still achieve attractive returns. Working with a professional adviser to balance your portfolio of stocks, bonds and cash is recommended to get the right mix.

Joe Duran, CEO of United Capital, says "whether this bull market in bonds continues for another decade or not, it will make no difference to the fact that it is mathematically impossible for your future returns to look like the past. Therefore, your future actions should be different from your past actions."

-- Written by Lindsey Bell in New York.

>To follow the writer on Twitter, go to Lindsey Bell.

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 18,053.71 +23.50 0.13%
S&P 500 2,088.77 +6.89 0.33%
NASDAQ 4,806.8590 +33.3870 0.70%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs