Easing inflation could turn more US investors’ eyes toward bonds
August 17th, 2008 | by admin |Investors who rushed to the relative safety of bond funds when the stock market began to stagger last year might have felt they had outrun the troubles in equities - only to face the new threat of inflation when oil prices started soaring. But with the cost of crude now falling, some fixed-income investors could find themselves in an enviable position.
In the case of bonds, lower prices for oil and other commodities can reduce the risks of inflation eating into returns. And if the decline in oil signals a slowing global economy rather than simply an overheated market taking a break, the sure-footedness of bonds could look even more attractive.
Most investors find it easier to rely on bond funds rather than trying to navigate the complexities of the bond markets themselves. A fund also will likely mean holdings are more safely spread out over a range of investments.
Compared to the stock market, which has been pounded by the credit crisis, many types of bond funds have fared reasonably well over the past year. The credit problems have exacted a toll on riskier parts of the market, including the asset-backed debt that includes everything from mortgages to credit cards. But government bond funds, for example, have held up. Despite bond funds’ relative soundness, investors have been concerned about the problems inflation poses for their holdings.
Paul Herbert, associate director of fund analysis at investment research provider Morningstar Inc., said that while inflation is a “bond killer,” investors also need to consider whether a lasting pullback in prices will spur the economy.
So if the economy remains weak, investors in the safer parts of the bond market might fare better than in parts of the market more dependent on the health of corporations, for example. For investors willing to trade lower returns for safety, there are opportunities, observers say.
Bill Keller, an investment director for PNC Wealth Management, said investors who might have strayed into areas with higher yielding but riskier investments or those who are looking for other ideas might consider municipal bonds.
This part of the market appears on the mend after investors grew fearful of defaults at the start of the year. The muni market is traditionally attractive for its very low risk of debt going bad.
“In February we looked and said every municipal bond is going to go bad,” he said of market sentiment. Noting how quickly Wall Street’s mood can shift, he pointed to comments from some market observers little more than a month ago that oil was headed toward $200 a barrel.
Robert Auwaerter, head of fixed income portfolio management at Vanguard Group, said Treasury Inflation Protected Securities, or TIPS, could be a good fit for some investors. The principal on these investments is linked to government inflation figures and increases as prices rise. Wherever investors put their money, they shouldn’t have unrealistic expectations about market conditions, Keller said.
Tim Paradis writes for the Associated Press.
