Bond markets wary of decline under Clinton

Andrew Leckey

November 11, 1992|By Andrew Leckey | Andrew Leckey,Tribune Media Services

As soon as Bill Clinton appeared to have a lock on the presidency, nervous bond markets began to shake, rattle and roll.

Such a battering was understandable. After all, bonds had outperformed stocks not only for the past quarter, but the past five years as well, a result of steadily declining interest rates.

Being aggressive and investing long term has been highly profitable for some time. Investors hold a whopping $224 billion in taxable bond funds and many captured total returns of 15 percent to 20 percent over the past year. Normally, these funds' returns would have resembled their coupon rates of 8 percent to 10 percent.

Although Clinton will soon be seated in the Oval Office, a weak economy should keep interest rates from going out of control and dramatically reducing the value of existing bonds. However, the days of outlandish returns have probably ground to a halt.

"Investors associate Clinton's win with a greater potential for more government spending, rising inflation and other factors that would cause bond prices to fall," explains Don Phillips, publisher of the Morningstar Mutual Funds publications.

"Keep in mind that vehicles such as long-term bond funds are choices for people who will keep their money in up to five years, and shouldn't be replacements for bank certificates of deposit or money-market accounts."

Investors may have to set goals a bit lower.

"Over the next 12 months, the long-term Treasury bond should continue in a trading range between 7.25 percent and 8 percent, but high total returns of the past year are unlikely to be repeated," predicts Richard Davis, executive vice president with Duff & Phelps Management Co. "Buy quality, since higher-grade securities should do better than lower-grade, and I believe corporate and mortgage-backed securities make particularly good investments right now."

To be on the safe side, investors may wish to shorten maturities of the bonds and bond funds they hold, just as many portfolio managers have done.

National Multi-Sector Fixed Income Fund "A," up 19.51 percent in total return over 12 months, cut maturities from 6 1/2 years to five years in the past six months. Others prefer two to four years.

"In light of the Clinton victory, the investor probably shouldn't be adding to bond positions dramatically, but I wouldn't be selling either," says Ole Dial, chief investment officer for National Multi-Sector Fixed Income Fund "A."

"The economy still needs a lot to fix it, Clinton won't be changing the economic near-term outlook significantly and the bond market is so beaten down it's likely to rally."

There's also a feeling in other quarters that, despite an upward bias in rates short term, they'll come down over the long haul.

"Clinton ran on a fiscal stimulus policy which spooked the bond market because it was interpreted as inflationary," contends Mark Durbiano, portfolio manager of Fortress Bond Fund, up 20.29 percent in total return the past 12 months, sticking with long-term maturities.

"The reality is that, given the fact the difficult budget deficit will limit the new president's flexibility, strong fiscal stimulus policies are unlikely to occur."

Top-performing "mostly-investment-grade" taxable bond funds in total return (yield plus value of underlying bonds) over the past 12 months, according to Morningstar, are:

* Fortress Bond Fund, Federated Securities, Pittsburgh; $53 million in assets; no "load" (initial sales charge) through 1992, but goes to 1 percent load in 1993; $1,500 minimum initial purchase; 8.23 percent average bond yield over 12 months; up 20.29 percent.

* National Multi-Sector Fixed Income Fund, "A" Shares, National Securities & Research Corp., Greenwich, Conn.; $140 million in assets; 4.75 percent load; $2,500 minimum initial purchase; 8.82 percent average bond yield over 12 months; up 19.51 percent.

* Alliance Bond Monthly Income Fund "A," Alliance Fund Distributors, Secaucus, N.J.; $66 million in assets; 4.75 percent load; $250 minimum initial purchase; 8.44 percent average bond yield over 12 months; up 19 percent.

l * Loomis Sayles Bond Fund, Loomis, Sayles & Co. Inc., Boston; $14 million in assets; no load; $1,000 minimum initial purchase; 8.37 percent average bond yield over 12 months; up 17.80 percent.

* Janus Flexible Income Fund, Janus Group of Mutual Funds, Denver; $211 million in assets; no load; $1,000 minimum initial purchase; 7.93 percent average bond yield over 12 months; up 17.07 percent.

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