Expect bonds to gain favor with new rules on pensions

Your Money

August 07, 2005|By BILL BARNHART

THE SUNNY July rally in the stock market brightened many vacations. You loll on the beach, and your stock portfolio grows.

Now, it's back-to-school time. Sit up straight. We're going to talk about bonds.

Only 44 percent of mutual fund owners hold bond funds, according to the Investment Company Institute, a trade association for mutual funds.

At a time of low interest rates, investors snub fixed-income securities, despite the relative safety of government and high-grade corporate bonds.

But the travails of the nation's pension funds teach an important lesson.

Critics are asking whether pension trustees, responsible for providing for retirement income for workers, should entrust 60 percent or 70 percent of pension dollars to the stock market, with 40 percent or 30 percent in fixed-income investments. These are typical ratios of stocks versus bonds in the pension world.

Proposed corporate accounting changes would require companies to report a reduction in quarterly profit results if the market value of their pension assets is less than the present value of their future pension liabilities.

"If pension laws change, you would have to flip that stocks/bonds ratio on its head. Likely, those changes would have to be phased in over time," said Patrick Haskell, head of North American interest-rate sales and trading at HSBC Securities.

"If we changed our pension accounting laws, there is no question that there would be significant asset allocation trades that would need to be done," he said.

Individual investors take note: If long-term interest rates rise and pension changes are enacted, as many economists expect, bonds may become even more appealing compared with stocks.

Fueling the debate, the Treasury Department plans to resume issuing 30-year Treasury bonds next year. Thirty-year Treasury bonds are a hair-trigger gauge of inflation fears and can be quite volatile.

But 30-year Treasuries are important as a performance benchmark for investment portfolios and a hedge against other long-term investments.

Quasi-government agencies, such as Fannie Mae, and corporations likely will follow suit, with additional long-term bonds that will compete with stocks for investor dollars.

"A re-issuance of the 30-year bond will aid in allowing managers to source additional areas for long-duration" investing, said Mike Donelan, a portfolio manager at Ryan Labs Inc. "It's definitely going to broaden the market. Does a 30-year compete with equities? Sure."

The 30-year Treasury bond yields about 4.6 percent nowadays, without any risk of loss.

Are you as confident about your stocks? If long-term rates move higher, the comparison will become even tougher for stocks. Current trading in 30-year Treasuries provides clues about interest-rate trends.

John Kosar, a technical analyst with Asbury Research LLC, says the willingness of traders to hold 30-year bond futures is an essential forecasting tool.

Lately, traders have been reluctant to hold 30-year Treasury futures, even overnight. "People don't want to hold bonds," he said.

Friday's strong employment report sent bond prices lower and yields higher. If that trend continues, bonds will start to look like bargains compared with stocks.

Bill Barnhart is a columnist at the Chicago Tribune, a Tribune Publishing newspaper.

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