Bonds: Back in Style or Risky Bet?
With the Dow below 7,000 for the first time in over a decade, more investors are flocking to the relative safety of bonds. In fact, bonds will make up 2% of household financial assets this year – up from 0.2% last year, according to a report by Merrill Lynch.
But Ivory Johnson, a certified financial planner and director of financial planning for Scarborough Capital Management, believes that bonds are one of the riskiest parts of the market right now. Bondholders have to deal with the various factors of a slowing economy beginning to affect their holdings. What happens when pensions come due for cash-strapped municipalities that have issued you munis? What about the corporate bonds you hold in a company that drastically misses its earnings? And for treasuries, considered one of the safest bets around, what happens as the government increases debt and further dilutes the value of the dollar as it begins to spend billions in stimulus money? All these issues could negatively affect the value of bonds – whether they’re government, municipal or corporate backed, says Johnson.
Also, we're going to see inflation at some point. If you buy a bond, you are waiting to be paid back in a currency that won't be worth as much in the future. Bonds can be part of your portfolio, Johnson says, but they are not a safe haven.
CNBC’s Managing Editor Tyler Mathisen has a different take. High-quality general obligation municipal bonds remain a “good place to put you money,” he says. The yields should stay secure and while there is concern that interest rates will go up and pose a risk to the principle, the tax benefits should outweigh the risk.