Bond ETF Investors Overconfident After 30-Year Rally? | ETF Trends

Bill McNabb, chief executive of mutual fund and ETF giant Vanguard, is worried about what could happen to bond investors if yields finally start to rise from rock-bottom levels.

“You could argue it’s almost as extreme as stocks were in 1999,” the Vanguard CEO tells Investment News.

The iShares Barclays 20+ Year Treasury Bond (NYSEArca: TLT) has an annualized return of 14% the past three years to outperform U.S. stocks.

Bonds have enjoyed a bull run of more than three decades and yields have been pushed to near record lows in the aftermath of the financial crisis. However, rising interest rates would eat into bond prices and punish investors who have piled into fixed-income funds and ETFs.

McNabb isn’t predicting that bond funds will suffer the same fate as stocks experienced after the dot-com crash over the next 10 years, but he is warning clients that they need to reduce their expectations, according to the Investment News story.

“It’s always dangerous to predict returns, but the probability of bonds having the same return over the next 10 years as the last 10 is almost zero,” he said, while pointing out that investors shouldn’t totally abandon bonds since they can diversify an equity portfolio.

Treasury yields have pulled back somewhat this week after U.S. government debt was off to its worst start to a year since 2009. Bond yields and prices move in opposite directions. [Inverse Treasury ETFs Rally]