These ETFs are Vanguard Total Bond Market ETF (NYSEArca: BND), iShares iBoxx High Yield Corporate Bond Fund (NYSEArca: HYG), iShares iBoxx Investment Grade Corporate Bond Fund (NYSEArca: LQD), SPDR Barclays High Yield Bond (NYSEArca: JNK), Vanguard Short-term Bond ETF (NYSEArca: BSV), iShares JPMorgan USD Emerging Markets Bond (NYSEArca: EMB), Vanguard Short-Term Corporate Bond (NYSEArca: VCSH), iShares Barclays MBS Bond Fund (NYSEArca: MBB) and iShares has the Barclays 1-3 Year Credit Bond Fund (NYSEArca: CSJ).
“The average price return over the period was 6%, and the average annual yield is currently 3.4%. Average duration is 4.3 years, with a pretty wide swath of 2-almost 8 years in that mix,” the strategist points out.
“Assuming our mini-sample is representative of the average investment profile for the bond portion of a portfolio, we can take an educated guess as to how much interest rate risk they might be able to bear before their ‘House money’ effect begins to lose its courage,” Colas adds.
He makes a rough estimate that a typical investor is up about 16% over the past three years in their diversified basket of bond investments, and assumes they start to get cautious if they lose half of that over the course of 2013.
“The average duration of 4.3 years means that interest rates would have to move about 200 basis points before our ‘House money’ blessed bond investor got skittish. That basically means a U.S. 10 year Treasury yield of 4%, rather than the current 2% (assume spreads stay pretty constant),” the ConvergEx strategist concludes. “Up until that point, investors may well play the reallocation game (as long as stocks maintain their uptrend). After that, they pull in the horns and probably reduce risk.”
Full disclosure: Tom Lydon’s clients own BSV, EMB, JNK, HYG, LQD.