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Boil and Bubble: Potential Bond Trouble

"Double, double. Toil and Trouble. Fire burn and cauldron bubble." This is dialogue from Shakespeare's play Macbeth. Translated into today's vernacular, it could describe what many see as a bubble in today's bond market.

[CLICK HERE to read the article, "Vanguard's McNabb on Budget, Taxes and Bubble Risks," at The Wall Street Journal, April 10, 2013.]

After all, bonds have enjoyed quite a run for 30 years, when interest rates began slowly declining from their record highs to today's near record lows. Even though traditionally, bonds have typically served as a conservative allocation in an investor's portfolio, they can pose higher risks in a rising interest rate environment.

[CLICK HERE to read the article, "The Big Bet on Rising Rates," at Wealth Management, April 3, 2013.]

When you consider today's low, low interest rates - an environment held stagnant by the Federal Reserve's actions - the general feeling is that in the future rates can only go in one direction. Up. Up is a problem for bonds - particularly longer duration bonds that are more sensitive to changes in interest rates.

[CLICK HEREto read the article, "Bonds Most 'Overbought' In 55 Years, Loomis Sayles's Fuss Says," at Bloomberg.com, January 30, 2013.]

So what's this bubble people are talking about? The Financial Industry Regulatory Authority (FINRA), a non-governmental agency that self-regulates brokerage firms, tries to protect investors with securities compliance procedures and by providing information to the public to make it aware of potential investment risks. Recently FINRA issued this warning about how interest rates can impact bonds:

"Currently, interest rates are hovering near historic lows. Many economists believe that interest rates are not likely to get much lower and will eventually rise. If that is true, then outstanding bonds, particularly those with a low interest rate and high duration may experience significant price drops as interest rates rise along the way. If you have money in a bond fund that holds primarily long-term bonds, expect the value of that fund to decline, perhaps significantly, when interest rates rise."

[CLICK HERE to read the alert, "Duration - What an Interest Rate Hike Could Do to Your Bond Portfolio," at FINRA.org, February 14, 2013.]

[CLICK HERE to view the video, "Bond bubble/bond cliff: How should you respond?," at Vanguard, January 28, 2013.]

There are good reasons to invest in bonds but, depending on your objectives, there are also good alternatives that can generate income while managing the risk to your principal*. If you'd like to discuss fixed income vehicles and learn more about bond alternatives, please give us a call.

*Guarantees are backed by the financial strength and claims paying ability of the issuing insurance company.

Certain fees and limitations may apply. May not be suitable for all investors.

By contacting us, you may be offered information regarding the purchase of insurance products.

The information and opinions in any linked articles are provided by third parties and have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. They are given for informational purposes only. They should not be construed as advice for an individual's situation.

If you are unable to access any of the news articles and sources through the links provided in this text please contact us to request a copy of the desired reference.

Pension Trends

If you could look into a crystal ball and predict which retirement income plan was more likely to be around in 20 years - would you choose Social Security or company pensions?

[CLICK HERE to read the article, "President Obama looks to reduce Social Security cost of living increases with 'chained CPI'," at marketplace.org, April 5, 2013.]

As much as the solvency of Social Security is constantly debated, it may well stay the course long term in some shape or form. Pensions, on the other hand, are rapidly heading towards extinction. The latest pension plans potentially facing cuts include Boeing and Major League Baseball (MLB).

Boeing recently announced its intention to stop offering pensions to new employees, joining the ranks of other large corporations that have adjusted pension offerings, including GE, Lockheed, Ford and General Motors.

[CLICK HEREto read the article, "Boeing's latest move confirms nationwide trend to end pensions," at KPLU.org, March 1, 2013.]

[CLICK HEREto read the article, "Ford's Leaky Pension Boat is a Multi-Billion Dollar Problem," at Forbes, March 31, 2013.]

It may be just as well, since pension plan funding has suffered significantly in recent years. In fact, Boeing has set aside only three-quarters of the $75 billion it owes for future pensions, a sum that represents more than the company's current stock market value.

Boeing is not alone in its savings deficit. According to Olivia Mitchell, executive director of the Pension Research Council at Wharton Business School of the University of Pennsylvania, U.S. corporations currently boast the highest level of pension underfunding in history.

[CLICK HEREto read the article, "Are Pensions Dead?" at The Motley Fool, March 30, 2013.]

Even the MLB, despite climbing revenues of $8 billion a year, is considering cutbacks and/or alterations to pension plans offered by ball clubs. Similar moves by other organizations may not eliminate current pension plans, but they might stop contributing to them.

[CLICK HERE to read the article, "Personnel pensions on cutting block," at ESPN, March 20, 2013.]

The lesson here is that we may be on our own going forward. Within a couple of decades, the majority of our retirement income may result from our own planning, saving, investing and purchasing insurance policies to protect our income in retirement.

[CLICK HEREto read the article, "Lessons from the Financial Crisis," at Fidelity Viewpoints, April 2, 2013.]

If you'd like to discuss ways to generate and protect* retirement income in a world where individuals control their financial future, please give us a call.

By contacting us, you may be offered information regarding the purchase of insurance products.

*Guarantees offered by annuities are subject to the financial strength and claims paying ability of the issuing insurance company.

The information and opinions in the linked articles are provided by third parties and have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. They are for informational purposes only and should are not intended to provide specific advice nor provide the basis for any purchasing decisions.Certain fees and limitations may apply. May not be suitable for all investors.

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