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Negative returns on bonds

By Sheyna Steiner ·
Wednesday, August 25, 2010
Posted: 2 pm ET

Bonds continue to be a hot topic in the news. Reuters reported this morning that the 10-year Treasury note is yielding 2.44 percent, a new low since January 2009.

I'm writing a story about buying bonds and have run into a couple of different strategies that investment advisers are using right now when it comes to fixed income investing. Most of the people I've spoken with are being cautious when it comes to buying bonds but the level of concern varies.  

At least one adviser, Bill Larkin, portfolio manager at Cabot Money Management in Salem, Mass., is pretty bearish on bonds in the current environment. He believes it's a tough environment right now with little relative value to be found.

"The problem is that we have a CPI that from Aug. 31, 1988 to July 31, 2010 is running about 2.9 percent period average. We're at 1.2 percent coming out of negative territory," he says.

"If we look at the parts of the market that are under the long-term inflation rate, for instance the U.S. Broad Market, 1 to 3 years (an index) is yielding 1.6 percent. So that means that a good portion of the bond market is likely to return, in real terms, inflation-adjusted negative returns -- unless deflation really kicks in," says Larkin.

When you factor inflation into today's yields you're losing purchasing power over time. 

Then again, investors can run into problems stretching for yield, which puts most people right now between a rock and a hard place.

The best answer I've found is to use a diversified fixed-income strategy for your portfolio. That seems to be the easiest answer for most market woes, though there are more than enough experts who would disagree.

What other options are there for fixed-income investors to manage risk these days?

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