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Saturday, December 17, 2016

Are You Freaking Out About Bonds?

Interest rates are rising and do-it-yourself investors know that pushes bond prices down. The mainstream media loves this kind of story. Scaring investors is a whole genre within the financial reporting sphere. The reporting today anticipates the shock coming when investors check out their quarterly statements.

Well, actually (here's the news for the mainstream news) most investors, if interested, can go online and see their up-to-date results. Waiting for quarterly statements is last century for many investors, especially DIY investors.

So, what about bonds? Let's take the perspective of an investor, i.e. someone who  invests longer term.

The index most widely used to measure bond market performance is the

Barclay's (formerly Lehman) Aggregate Bond Index.

It is an intermediate bond index and is to the bond market what the S&P 500 is to the stock market. It tracks all investment grade bonds in the U.S. with a maturity of greater than one year (once a bond comes to within a year of maturity it is dropped from the index). Thus, the index includes U.S. Treasury Notes and Bonds, Corporate issues, and U.S. Agency issues. It is the most widely used benchmark by professional bond managers to assess and report on their performance. As a point of reference, most surveys are reporting that professional, active bond managers are under performing the Aggregate Index this year.

So how has it done? The yield on the benchmark 10 year Treasury Note has had a nasty back up from 2.22% at the beginning of the year to 2.60% as of Friday's close. So what has been the impact on performance? Shorter term the fear mongers are right. Over the past 3 months the Index has had a total return of -3.55%. But for the year-to-date the return is +1.62%! Pretty good compared to what people are getting on certificates of deposit and especially on money market fund.

In fairness, the return is not great compared to inflation. Still not something to freak out about. The yield on the index is 2.36% and this will be an important return determinant of the the longer term performance.

Most often investors capture this return by using the


exchange traded fund which has an expense ratio of .06%, i.e. 6 basis points.

Also, it is notable that, just as there are many way to play off the S&P 500 in the stock market, there are many ways to buy bond index funds that will perform differently than the Barclay's Aggregate Index. There are funds, for example that focus on different sectors and funds that have much different durations.

The above information as well as much more can be found by plugging the ticker symbol AGG into


You'll note at the site that there is a "performance" link which provides up-to-date performance.

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