A reader asks:
"Roger as asset classes go lot of pundits are warning about interest rates rising and warning to get out of bonds, or change duration mix. Have you changed your asset holdings based on these warnings?"
My feeling is unless economy improves interest rates are unlikely to increase significantly.
This is ground we have covered before but worth going over because of what is likely a long time table. Hopefully it is clear that buying the U.S. 10-year Treasury yielding first 3%, then 2% and what has been sub 2% for many months now is buying high. People buy high with the hope of prices going higher but buying high is buying high and that takes on risk.
For many years, including the aftermath of the financial crisis buying high has been rewarded with even higher prices. I would have thought there would have been a negative consequence to years of buying high by now but that has not been the case as the Fed continues to distort markets but the intermediate part of the yield curve and farther out the curve is where the most risk is. It may be years before this matters but this is where there is the most risk.
If you can isolate the part of the market that has the most risk then it becomes very easy to figure out for yourself whether you want to take on that risk or not. It is a risk we prefer not to take but you may draw a different conclusion and may get out before the risk matters.
We own a combination of shorted dated corporate bonds with very little interest paid but we avoid interest rate risk. We own short dated foreign sovereign debt which typically yields a little more but does take currency risk. We have a couple of preferred stocks -- the yield there is pretty good. And we own a few other things via funds like emerging markets that also have decent yields.
Where the risk is so obvious I would prefer to simply avoid that risk. I agree with the reader that it seems unlikely that rates will go up soon but I would prefer to not buy relatively poor fundamentals at very high prices (long dated Treasuries). We have generally avoided treasuries for quite a few years now in line with the thinking outlined above.