For the last couple generations, one of the most basic ideas of investing has held true: bonds are less risky than stocks. However, all things must change and investors must seriously reconsider the risk of low interest rates, a flood of money into bonds and the unprecedented market distortion of the Fed's quantitative easing policies.
Richard Saperstein, CIO of Treasury Partners cut straight to the heart of the matter in an interview with CNBC's “Squawk on the Street:”
"Bonds are an extremely risky investment right now, given where the economy is and the potential rise in rates...
"If we talk about the risk of stocks versus bonds, we have to calibrate it relative to historical averages," he said. Saperstein points out that for the last 50 years the 10-year Treasury has outperformed the S&P [500]. Today, this relationship is reversed.
"There's a real mismatch between where the valuations of equities and bond yields are. In the past 5 years $1.1 trillion has moved into bond mutual funds and $400 billion has moved out of equity mutual funds.”
As Wealth Daily editor Briton Ryle points out: "Most bond investors are too focused on the Fed's interest rates policies and not the tools it is using to suppress interest rates in the market."
While it appears that the Fed will be holding interest rates low until some time in 2014 when it hits a 6.5% unemployment rate target, it is the constant purchase of $80 billion of bonds per month that is holding rates in check.
If and when the quantitative easing stops, he predicts that interest rates could rise by 20% virtually overnight, wipe out and existing gains and lead to a loss.
The interview with Mr. Saperstein may be found below. To view Mr. Ryle's detailed analysis, please click here:
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