June 19, 2013

More Risk Than Return- Revisited

  

By David R. Hines, CFA

Director of Research

 

Recent indications that the Federal Reserve Bank has plans to "taper" its quantitative easing program in the coming twelve months has given bond investors good reason to bid interest rates meaningfully higher.

The graph below illustrates the rise in the yield of a 10-year Treasury note since May 2. Income-producing securities have experienced a sharp downward correction in value as a direct result of the rise in interest rates.

 

 


 

As readers of these notes know, we have been wary about portfolio exposures to securities that would be affected by an upward move in interest rates, such as long maturity bonds and high yield equities (especially those dividend paying stocks with poor dividend coverage and poor growth prospects). In the current interest rate environment we have expressed concerns that even a small upward move in interest rates could cause large negative price movements in the value of such securities. In our view today's low income yields present far more downside risk than return potential.

 

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MARKET LOG
June 18, 2013

S&P 500: 1651.81
10 year T-Note: 2.19%
Crude Oil: $97.88
Gold: $1366.00


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