News Article | January 1, 2015 |
Bond Strategy with David Wright
AP Insider Q&A – Follow the financial media and you’re bound to hear someone predicting trouble in the bond market. But it won’t be David Wright, co-founder of Sierra Investment Management. Wright argues that the benefits of holding U.S. government bonds, Treasurys, compensate for their very low yields. He says that bond prices could go even higher and yields even lower.
For years now, people have been saying that long-term interest rates will soon climb and cause steep bond losses. What do you think?
We’ve never bought into that. It has been the myth spouted by all the talking heads on CNBC. The right attitude is to be agnostic. If there were anybody on the planet who could predict the turning point for the bond market, we would all know their name. Zero people have ever been able to do that. Our attitude is to be agnostic as to when the next turning point comes.
Has this shaped how you manage investments?
In our view, it’s smart to have a larger than normal allocation to Treasury bonds and other high-grade bonds – more than 40 percent, given our outlook for the stock market. Treasurys are unique investments. People around the world believe they’re immune from default, and I believe that, too. U.S. Treasury bonds are pretty much the only investment on the planet that academics and analysts think has zero default risk. There’s a trust that, despite everything, the U.S. government will pay its debts.
Aren’t you making a big sacrifice by putting so much in Treasurys that pay 2 percent?
The conventional wisdom is that bonds are the cream in the coffee, and equities are the coffee. That’s not how we see it. Of course Treasury yields are very low. Therefore, there’s this clamor that you need to find something else. What that has created over time is an overloved, overvalued stock market. It can’t go on forever.
But let’s say you believe that stocks are going to outperform. Why not put 100 percent of your money in the S&P 500? The first answer is that there are long spans of time where you make zero holding stocks. The second is that you know the stock market, the S&P 500, is going to fluctuate substantially. Bonds give you some protection from that.
Interest rates are bound to creep higher at some point. Bonds will necessarily fall.
Sure. But bonds can also rise in value, even from here. If the 10-year rate drops another 75 basis points, people holding 10-year Treasurys are going to make a lot of money.
Interviewed by Matthew Craft. Answers edited for clarity and length.