The article's idea is that the interests 30 years ago were peaking at 12-15% for bond, CD, and money market funds (these investment is called "fixed income"), and rates had nowhere, but lower, to go - meaning the prices of bonds would go higher since 1982.
30 years later, now the interests have reversed to the bottom (near 0%), thus, the fixed incomes are peaking, and will be out of favor, and the rates would only have to go higher, and the bond prices will go lower from now on. If you buy bonds now, the interest rates may not even match the inflation in future. The point Merrill's call is to SWITCH TO STOCKS, now. The situation is bad everywhere now. However, the stock markets are always at least 6 month ahead of the real situation changes. When regular people see the economical improvement, the stock market will be 25-30% higher already.
| THURSDAY, OCTOBER 11, 2012, Barron's
Sun Setting on Bonds?
Three decades after declaring the "Dawn of a Bull Market" for fixed-income, Merrill calls for major switch to stocks.
Some 31 years ago, Merrill Lynch made an audacious market call. Not that it was bullish on America, as its iconic advertising campaign asserted; to say otherwise would be apostasy, after all. No, in 1981, the Thundering Herd declared the "dawn of a new bull market in bonds."
In a switch a generation, Bank of America Merrill Lynch's strategists now are declaring, "The Bond Era Ends." No longer will fixed-income securities outperform equities. And the "Great Rotation," as they call it, will commence next year.
To grasp the import of this call, consider what happened more than three decades ago. The myriad divisions of Mother Merrill all got on board with its clarion call to buy bonds, from the economists to the strategists to the fixed-income gurus and, last but far from least, legendary market analyst Bob Farrell. All of them sang from the same hymnal that high-grade bonds yielding 15% or more presented a historic investment opportunity.
That, to say the least, was controversial at the time. No asset class was more despised than bonds. After a generation of rising interest rates and inflation, fixed-income securities came to be called "certificates of confiscation." The joke of the time went, "How do you make a million dollars in bonds? Start with $2 million." And the Dr. Doom of that era declared bond yields still had further to rise, which made more principal losses likely.
And when Merrill mounted its ad campaign, 15% bonds went to 16%, resulting in price losses. The public also saw money-market mutual funds -- the hot investment of the time -- paying 17%, so why take the risk? And stocks? The Death of Equities was declared a couple of years earlier; case closed.
Indeed, the case for bonds then was unassailable, if only in hindsight. The math of 15% bonds made them a no-lose proposition over time. Such high coupons paid every six months offset price declines. And, as modern bond managers learned, reinvesting those coupons at progressively higher yields produced decent total returns -- even in the teeth of a bond bear market.
Today, investors face the polar opposite situation. In contrast to the record highs of the early 1980s, bond yields are at historic lows. And, nevertheless, the public continues to flock to bond funds while institutional investors such as pension funds commit to bonds. The latter do it with the foreknowledge that, once yields inevitably rise, they won't lose. Institutions buy day in and day out and put their money to work at progressively higher yields, while the present value of their future liabilities are reduced by rising interest rates.
For those investors in the real world and care about the actual value of their assets, Merrill looks for the rotation from bonds to take hold next spring. That points to a "risk-on" portfolio mix.
As detailed by chief investment strategist, Michael Hartnett, Merrill's asset-allocation advice is to "stay overweight Bubble Themes," which should benefit from expansionary policies of the European Central Bank and the Federal Reserve. In other words, asset classes that benefit from high liquidity but low growth.
That means overweight positions in gold, corporate credit, emerging-market debts and U.S. stocks, notably technology and other quality, large-capitalization names. "The more liquidity central banks pump into the system, the greater the likelihood these investment themes evolve into full-scale bubbles," according to the Merrill team's research note.
In this space, there has been an oft-repeated hypothesis that Treasuries in effect represent put options against risk assets such as equities and corporate credit. Treasury securities could be relied upon to rise in price whenever the stock market swooned in reaction to crisis situations such as the European debt situation. As a shock absorber, Treasuries have performed that role well.
To declare the "Era of Bonds" is over is indeed audacious. But a generation ago, investors flocked to money-market funds, which paid the highest yields but gave up the potential for capital appreciation and superior total returns.
In an analogous situation, investors continue to go for bond funds in their desire for income and avoidance of capital losses after the trauma of 2008-09. But bond funds may offer neither real income returns or capital protection if yields rise and prices decline.
Comments? E-mail: randall.forsyth@barrons.com
