Allen Ostrofe: Is the bond boom … busted? |

Allen Ostrofe: Is the bond boom … busted?

Earlier in this century, a famous Austrian general reputedly commanded his troops, “Forward comrades… we must retreat!”

Retreat, for a lot of today’s bond investors, might actually be sage advice.

I recently visited a conference in Boston, listening to the chief strategists from Fidelity, Vanguard, JP Morgan, Standard & Poor’s, Avatar and Russell – some of the most recognized names in the investment world.

While each had their unique take on the economy and short-term strategies to take advantage of opportunities, they all seemed to agree on one point: Way too much investor money is going into the bond market. Bond markets are growing riskier as investors seeking steady returns bid up prices – and ignore some early warning signs, similar to those that flashed during the credit bubble.

According to the Wall Street Journal (Sept. 20), in the last weeks, prices on high-yield – or “junk” – bonds hit their highest level since 2007, meaning the dividends they pay to investors has dropped to new lows.

As a country, we are borrowing $800 billion from a bank that doesn’t really exist (you and I cannot do business at the Federal Reserve). The plan is to pay back this debt by printing more dollars. History has shown the printing of more dollars will eventually cause inflation in the following three to five years. As inflation rises, historically, bond values go down.

Industry analyst Morningstar recently stated that 70 percent of all new investor money is going into bond securities. This is a perfect example of the investor “herd effect.” People are purchasing investments that performed well in the recent past, with the expectations that they would continue to do so under today’s very different economic conditions.

Loading up on bonds, which is another word for debt securities, in today’s environment, would be similar to driving down the freeway looking through the rear-view mirror.

With interest rates low, and not expected to go lower, now would be an excellent time to consider reviewing your portfolio to see if your current investments have seen any gains you could capitalize on.

Signs of recovery continue to accumulate. The labor market has improved, with initial jobless claims falling in the week ending Sept. 4, by more than economists forecast.

When reviewing one’s investment portfolio, particularly at the beginning of a recovery, investors would be wise to consider other investment categories, such as emerging markets, gold, precious metals and commodities, international real estate, foreign currencies and sectors in the U.S. market such as energy and health care.

Therein may lie opportunity, should investors believe the rocky road to recovery has begun, and interest rates and inflation will be increasing slowly over the next three to five years.

We believe any seasoned investor would readily agree, there is no “the” market, but segment opportunities always exist. The booming of the bonds may well end up in a bust. But diversification of your portfolio beyond United States markets is a must.

Allen Ostrofe is president of Ostrofe Financial Consultants Inc. in Grass Valley. He can be reached at (530) 273-4425, or

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