“Fixed Income Strategies with Historically Low Interest Rates”
James Bernard, CFA
Director of Fixed income Investing
Ancora Advisors, LLC
As I write this article the 2 Year Treasury Note is yielding 0.19%, similar maturity AA
municipal bonds are yielding 0.40% and AA corporate bonds yield approximately 0.45%.
In addition to these historically low rates the FED is on record as saying, “They expect. . .
exceptionally low levels for the federal funds rate at least through mid-2013”. The
market is anticipating and in our opinion this language is indicating, that this two year
period of low rates is probably a minimum time frame and low rates for three to five
years or longer are very possible.
In this environment, how do investors position their bond portfolios to provide some
reasonable level of returns without taking significant credit or interest rate risk? For
funds above and beyond one’s daily liquidity needs, we continue to focus our buying on
intermediate maturity bonds, primarily in the 4-8 year area of the yield curve. This
allows for current income in the range of 2.00% to 3.00% for AA corporate bonds or
1.00% to 2.00% for AA municipal bonds. While these returns appear modest, it allows
for returns in line with current inflation rates without subjecting a bond portfolio to
significant credit or interest rate risk.
As readers of our quarterly letters are aware, another sector of the bond market we
currently find appealing are sovereign bonds in certain developed countries around the
world (see our website for more details and thoughts on our sovereign bond program).
We have been actively deploying this program since early 2011, and even though rates
have fallen, we still believe this strategy still has value. Unfortunately, we continue to
believe a weak U.S. dollar versus certain currencies is likely given the fiscal challenges in
the Unites State and its continued reluctance to address these issues in a meaningful
Ancora Advisor’s hesitancy to recommend either long maturity bonds or lower credit
quality bonds stems from our concern about the potential for significantly higher rates of
inflation in coming years. While inflation is likely to remain modest as long as economic
growth here and around the world remains in the low single digits, the continued printing
of paper money here and in Western Europe threatens to reignite inflationary pressures in
coming years, and in turn significantly increase interest rates and drive down the prices of
longer maturity bonds.
Besides the potential of lower bond prices in the future because of higher interest rates,
we are also concerned that lower credit quality bonds could see lower prices based on
wider credit quality spreads. Currently, lower credit quality bonds trade at historically
tight yield spreads to treasuries and any reversal of these historically tight credit spreads
could cause significant price erosion for lower credit quality corporate bonds. As an
example, during the weak equity markets of the first two weeks of August, the Vanguard
High Yield Index Bond Fund was down over 4%.
For those portfolios which are either currently underweighted in equities and/or willing to
assume the inherent volatility of equities, adding to one’s equity exposure, especially in
stocks with attractive dividend yields (2%-3% or higher), modest dividend payout ratios,
and a history of growing dividends, may offer an alternative to historically low bond
yields. (See our website for a recent article that discusses high dividend paying stocks
and how they may be utilized in an investment portfolio.)
In conclusion, for a number of years we have been advocating an emphasis on good
credit quality, intermediate maturity bonds as a safe haven during this period of
extremely low interest rates. As previously stated, we prefer individual bonds to bond
funds for those portfolios that can be adequately diversified. Bond funds currently offer
low yields, extremely limited upward price potential, and the potential for significant
price declines if interest rates increase a few years down the road. However, bond funds
would be preferable to individual bonds in those sectors where building a properly
diversified portfolio of individual bonds would be cost prohibitive given the size of the
portfolio. These sectors include high yield bonds (as stated above we would only hold
modest exposure to this sector), emerging market bonds, and other specialty sectors.
James M. Bernard
August 24, 2011
James Bernard is an Investment Advisor Representative of Ancora Advisor LLC a SEC
Registered Investment Advisor. He is also a Registered Representative and Registered
Principal of Ancora Securities, Inc. (Member, FINRA/SIPC).
The mention of securities and similar investments in this article should not be considered
as an offer to sell or a solicitation to purchase any investments or securities mentioned.
Please consult an Investment Professional on how the purchase or sale of such investment
can be implemented to meet your particular investment objectives goals. Past
performance of these types of investments is not indicative of future results and does not
guarantee dividends/interest will be paid or paid at the same rate in the future.
Investment return and principal value will fluctuate so that an investment when
redeemed or sold may be worth more or less than the original cost. The information
contained herein has been obtained from sources believed to be accurate and reliable.
Ancora Advisors LLC makes no guarantees as to the accuracy or completeness of this
Ancora Advisors LLC is a registered investment adviser with the Securities and Exchange
Commission of the United States. A more detailed description of the company, its
management and practices are contained in its “Firm Brochure” (Form ADV, Part 2a). A
copy of this form may be received by contacting the company at: 2000 Auburn Drive, Suite
300, Cleveland, Ohio 44122, Phone: 216-825-4000 or by visiting the website