Bond Investors Must Exercise Patience

As the global economy has recovered, commodity prices have been trending higher. Whether one looks at crude oil, industrial metals, agricultural commodities or livestock, the price direction over the past year has been up. This spells inflation. At the same time, the Federal Reserve Board (Fed) has maintained an anti-DEFLATION stance. We would agree that it would be easier to quell inflation should it arise in the future and if a policy error must be made, it would be towards preventing deflation. What this means for fixed income investors though, is that interest rates are likely to continue rising and therefore, bond prices on longer dated maturities will probably continue to weaken. So, a laddered bond portfolio structure with a “tilt” to the shorter maturity spectrum makes sense today given that this will protect a portfolio somewhat from weakening prices. In addition, this structure will enable better yields from the portfolio than what short term bonds and money market funds would pay. When all is said and done, it means fixed income investors should exercise great patience in this environment.

Robert M. Bilkie, Jr., CFA