Let's do a little hypothetical: Let's say you own a rental house that you paid $100,000 for back in 2006 and that you receive $425 per month in rent (not that great, I know, but pretend it is), and that the rental market doesn't allow you to raise the rent and retain your tenants. And let's say that, for whatever reasons, the going price for rentals like yours is now $175,000. You're thinking you gotta be kidding me, $425 a month on a $175,000 investment is only 2.9% on your money. Who would buy such a thing? Well, my hypothetical friend, you own such a thing.
If you're a regular reader, I've probably done enough bond-bashing of late to last you through 2014. But every time I read an article making a case for bonds, or some yield-generating, equally-interest-rate-sensitive, alternative, or review some other firm's disenchanted client's "conservative" portfolio and see it bulging with bonds, I feel compelled to reach out and make certain that you understand the inverse relationship between interest rates and bond prices.
I don't know that there's a bond market bubble just waiting to burst all over the world economy. The fact that that's a common concern suggests to me that it may not get as ugly as I once thought it might (although I still believe it gets uglier from here). It's my observation that when the consensus sees a calamity coming, it doesn't. I recall during the bursting of the housing bubble, many an "expert" was telling us that if we thought housing was bad, we ain't seen nothin yet. The coming implosion of the commercial market would make cake out of the housing mess. You remember what happened when the commercial bubble burst? Me neither. And of course the first taper of QE was going to rock the stock market hard. I believe the Dow rose 300 points that day.
But here's thing about bonds, from a risk/reward standpoint, they're not making sense to me these days. Barring a recession sometime soon, there's minimal upside and, particularly if the economy accelerates, plenty of downside. And never forget, the fixed income component of your portfolio is where you mitigate volatility.
The current yield on the 10 year treasury, a bond market benchmark, just about matches the rental scenario in paragraph one. Of course a critic would chastise me for comparing apples and oranges; truly, rental real estate carries substantially more risk than treasury bonds, right? Typically, yes. Today, however, I'm not so sure.