By Stan Choe
NEW YORK (AP) â¿¿ Investing in bond mutual funds is easy. At least, that's the way it was for decades.
Investors could count on steady interest payments. Their funds also benefited from rising bond prices, because interest rates made a three-decade-long march downward since 1981. When yields fell, bond prices rose: Each step lower made the bonds held by mutual funds more attractive because they offered higher rates than newly issued bonds.
But the tide has shifted. Many analysts say we have hit a bottom for interest rates, and the yield on the 10-year Treasury note has climbed to 2.5 percent from 1.6 percent at the start of May
The rise in rates has led to losses for many bond mutual funds, and it's something that investors need to get used to, says Rick Rieder. He is chief investment officer of fundamental fixed income portfolios at BlackRock, the world's largest asset manager. He oversees $650 billion in assets, including BlackRock's Strategic Income Opportunities mutual fund (BASIX), which can own everything from long-term Treasurys to short-term corporate bonds to debt from emerging markets.
Q: What's a fair return that investors can expect from their primary bond mutual funds? Is not losing money too much to ask?
A: For the last 25 or 30 years, people have counted on bonds to provide their interest payments, plus a little bit of price appreciation. People have been investing with that expectation, and if you were just patient, your bond portfolio would work for you. The world has changed. The last couple of months were illustrative of how much the world has changed. It didn't take a big move in interest rates to send long-dated Treasurys down 12 percent over a two-month period.
It became evident, quickly, that returns in bond funds are going to be more volatile, even high-quality bonds. Over the coming couple of years, people should count on hopefully the coupon return, which in today's environment is a little over 2 percent, with a potential for it being in a moderately rising rate environment, which could mean zero or slightly negative returns.