Clearly, investors are worried about deflation. However, a rise in interest rates would punish investors in bond funds. Also, rising inflation would hurt due to decreased purchasing power.
“I fully support getting your risk-tolerance balance in check, but [the rush to bond funds]seems like an overcorrection to me,” Justice wrote. “With interest rates remaining near all-time lows, what good can possibly come from all this interest in fixed income? I understand that stocks may seem scary, but bonds can underperform, too.”
Ashmore Investment Management estimates that anyone holding a 10-year Treasury bond when yields return to their historical average stands to lose more than 30% of their money. The average yield on the 10-year note over the past five decades was 6%, or closer to 7% if the spike in the early 1980s to nearly 16% is included. [Are Treasury ETFs Risk-Free?]
iShares Barclays 20+ Year Treasury Bond Fund (NYSEArca: TLT)
Full disclosure: Tom Lydon’s clients own TLT.