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Are you part of the most crowded trade in income investing?

October 25, 2017 By Jeremy Jones, CFA

Bloomberg reports that the most crowded trade in income investing is at risk of overheating. Long-bonds have been big winners YTD, but according to Bloomberg that trend may be at risk of reversing. Even if you aren’t interested in taking your investment advice from a news outlet, the risk in long-bonds far outweighs the opportunity.

The hottest craze in fixed income is at risk of overheating.

A headlong rush into higher-yielding, long-term bonds in recent years has created one of the most crowded trades in financial markets. Investors seeking relief from central banks’ zero-interest-rate policies have poured into government debt due in a decade or more, swelling the amount worldwide by a record $733 billion this year. It’s more than doubled since 2009 to about $6 trillion, data compiled by Bloomberg and Bank of America Corp. show.

Now money managers overseeing more than $1 trillion say the case for owning longer maturities — stellar performers for most of 2016 — is crumbling. There’s mounting evidence that inflation is starting to stir, just as some central banks hint that higher long-term interest rates may be the key to boosting growth. That’s troubling because a key bond-market metric known as duration has reached historic levels, and the higher that gauge goes, the steeper the losses will be when rates rise.

Rates are rising from a very, very low base, which means there’s lots of downside and very little upside” for bond prices, said Kathleen Gaffney, a Boston-based money manager at Eaton Vance Corp., which oversees $343 billion. She runs this year’s top-performing U.S. aggregate bond fund and has reduced duration and boosted cash. “If you don’t know how to time it, and I certainly don’t, you just want to get out of the way.

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Jeremy Jones, CFA
Jeremy Jones, CFA, CFP® is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Richard C. Young & Co., Ltd. was ranked #5 in CNBC's 2021 Financial Advisor Top 100. Jeremy is also a contributing editor of youngresearch.com.
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