After recently reading a fellow Seeking Alpha contributor's article "No Taper Is A Gift: Sell All Long-Term Bonds Now," I decided to take a look at the list of bonds I hold in my portfolio to remind myself exactly what I'd be giving up by taking his advice.
In addition to a diversified portfolio of stocks (individual stocks and two ETFs), I also hold a diversified portfolio of individual bonds. The bond allocation is laddered and includes the long-term bonds of many companies. As I went through the list, I came across AT&T's (T) longer-dated notes, CUSIP 00206RBA9, that I purchased with a yield-to-maturity of 5.797% and a current yield of 5.74534%. I also came across CUSIP 24668PAE7, the long-dated notes belonging to Delhaize Group (DEG). I purchased those notes at 82.405 cents-on-the-dollar for a 7.1637% yield-to-maturity and a current yield of 6.91706%. Then there is CUSIP 962166BT0 belonging to Weyerhaeuser (WY) that I own at a yield-to-maturity of 7.189% and a current yield of 7.12177%. I also noticed Bank of America's (BAC) longer-term debt, CUSIP 06051GEN5, that I own at a yield-to-maturity of 6.01% and a current yield of 5.99092%. So as not to bore readers to tears, I will stop there. Those four securities will be sufficient to help me make two points.
First, it is entirely possible that fixed-income investors own bonds that were purchased at such wide spreads to Treasuries that even if benchmark yields head much higher from here, the chances of escaping large unrealized mark-to-market losses on those bonds is quite high. This is especially true if benchmark yields head higher due to an improving economy, which could cause a further contraction in corporate bond spreads. In my case, I think three of the four bonds mentioned above, the Bank of America, Delhaize Group and Weyerhaeuser notes, fall into that category.
Concerning AT&T's bond, although a yield of 5.797% is not something every investor would consider outstanding, it is decent, and I'm happy with it. That brings me to my second point: When investors build their portfolios, whether it be in stocks, bonds, or something else, each security purchased should play a specific role in that portfolio. If you've built an allocation to longer-term bonds at yields and credit risks that you find suitable, do not allow yourself to be scared into selling by the chorus of "sell your bonds now" articles we've seen and likely will continue to see for the foreseeable future. If something specific to your situation requires you to sell, then you certainly should sell. But the type of blanket advice shared in the aforementioned article, such as "investors should take advantage of the sharp rally to sell out of all long-term duration in their portfolios" should be taken with a grain of salt. Whenever I see financial commentators use words like "always," "never" or, in the case of the article linked above "all" (emphasis added), I remain cautious as to the advice attached to those words.
Of course, I also recognize that the article may have been a serious attempt to help investors, and I would agree that it isn't a good idea to have too much duration exposure when investing in non-defined maturity bond funds. One obvious such example is the iShares 20+ Year Treasury Bond ETF (TLT) and its 16.30 year duration. Some investors might also consider the iShares Core Total U.S. Bond Market ETF (AGG) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) to have too much duration exposure at 5.09 years and 7.36 years, respectively.
In my case, I think I'll continue to collect the coupons on my longer-dated corporate bonds and reinvest that income in other attractive investments I may come across (whether stocks, bonds, or something else). And if yields go anywhere near the levels discussed in the article mentioned above, that would be a wonderful thing, as it would offer even better fixed-income opportunities than exist today. Remember, buying the dip and averaging into a position/allocation doesn't just work for stocks. It also works for bonds. But for some reason too many investors seem to forget that.
Additional disclosure: I am long the four CUSIPs mentioned in the article.