We've been extremely cautious deploying capital toward bonds/fixed income in an environment where interest rates scrape the bottom of the floor. The New York Times comments on the pain investors are feeling with rates on the rise...
"As if it wasn’t bad enough for the millions of
Americans scraping by on paltry interest payments, now they face another
threat: the loss of principal on their bonds and other fixed-income assets. The
month of May, and this first week of June, was terrible for many fixed-income
investors who have spent the last few years reaching for higher yields. If
there was an index for fixed income with the status of the Dow Jones Industrial
Average or Standard & Poor’s 500 Index for stocks, the carnage in
fixed-income markets would have been a big story and we’d all be talking about
a bear market in bonds.
Consider the damage: mutual funds that invest in long-term United States
Treasury bonds lost an average 6.8 percent in May, according to Morningstar,
with the loss in principal wiping out years of interest payments. But that’s
not the worst-hit sector. Higher-yielding bonds and fixed-income securities, to
which investors have turned in droves in recent years, have suffered even more,
especially mortgage-backed securities and emerging market debt, as well as just
about anything that uses borrowing to increase returns. Many individual
securities and funds were hit much harder than the averages. Vanguard’s
Extended Duration Treasury Index fund was down more than 6 percent in the last
month. In the mortgage area, Annaly Capital Management, a popular real estate
investment trust that invests in mortgages, fell 8.7 percent, and an iShares
mortgage exchange-traded fund lost 10.4 percent. Pimco’s Corporate Opportunity
Fund, which is managed by the star analyst Bill Gross and which invests in a mix
of corporate bonds and mortgage-backed securities and uses some borrowing, lost
nearly 13.4 percent. Annualized, such declines are off the charts."
