Historical Look At Bond Prices And Interest Rate Outlook

Includes: TBT, ZROZ
by: Pat Stout

Historical Look At Bond Prices & Interest Rate Outlook

A look at four corporate bonds issued in 1954, 1971, 1975 & 1979. The Northern States Power 3.125% due 1984, General Electric (NYSE:GE) 7.50% due 1996, General Motors (NYSE:GM) 8.625% due 2005 and the International Business Machines (NYSE:IBM) 9.50% due 1986. The high and low prices for 1971-1981 and 1982 are shown along with the S&P rating. Following is a review of the ProShares UltraShort 20+ Year Treasury (NYSEARCA:TBT) and the Pimco 25+ Year Zero Coupon (NYSEARCA:ZROZ) since 2011. And finally an outlook for interest rates.

Fixed income investors have enjoyed a good couple of decades with strong returns versus the stock market. As the saying goes, all good things must come to an end. It may not happen this week, this month or this year. But there will come a time when the fixed income market will inflict pain.

How much pain?

Consider what happened to these issues:

General Electric 7.50% of 1996

  • Issued 1971
  • Rating AAA

Price 1971-1981

  • 106.00 High
  • 55.50 Low

Price 1982

  • 80.50 High
  • 57.50 Low

International Business Machines 9.50% of 1986

  • Issued 1979
  • Rating AAA

Price 1972-1981

  • 103.50 High
  • 78.00 Low

Price 1982

  • 98.50 High
  • 83.25 Low

General Motors 8.625% of 2005

  • Rating AA+
  • Issued in 1975

Price 1972-1981

  • 109.750 High
  • 52.625 Low

Price 1982

  • 80.75 High
  • 56.00 Low

Northern Sts Pwr (Minn.) 3.125% of 1984

  • Rating AA
  • Issued 1954

Price 1972-1981

  • 80.00 High
  • 55.00 Low

Price 1982

  • 82.00 High
  • 73.25 Low

Source data: Standard & Poor's Bond Guide, September 1983

What has happened to ZROZ and TBT?

Since the middle of March 2012, the 10-year treasury yield has dropped from roughly 2.30% to 1.70%. This has propelled the Pimco 25+ year Zero Coupon issue from $95 to over $114. In July 2011 just before the debt ceiling crisis it traded in the low $70s. During October 2011 the price spiked to nearly $118. The ZROZ at $114.55 is nearing its 2011 peak price. This issue should decline when interest rates move higher.

The ProShares US UltraShort 20+ Year Treasury has been crushed. In mid March 2012 it was over $21 versus the close on May 17, 2012, at $16.32. In July 2011 it was over $33.00. This issue should increase with rising interest rates.

What next?

Tough to tell, but one must keep an eye on Congress, Europe and the Federal Reserve. Given that it's an election year anything can happen. Hopefully, we don't end up like October 1987 when the treasury bond market took a beating before recovering with the stock market in free fall.

Expectations for interest rates

It is tough to make a case for substantially higher or lower interest rates. The current situations appears to be trading range, of which yields have little room to decline. They are near the low yields. Though interest rates may not increase much. The longer-term the outlook is for higher interest rates.

Disclosure: I am long TBT.

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