WSJ: Money Managers Question Whether Bonds Are Overvalued After Strong Gains

Thursday, 03 Jul 2014 12:11 PM

By Dan Weil

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U.S. bonds have risen appreciably in 2014, leading money managers to wonder whether they are overvalued.

The Barclays U.S. Aggregate bond index returned 3.9 percent for the first half of this year. Junk bonds have shown particular strength, with the Barclays U.S. Corporate High Yield index returning 5.5 percent.

Average junk bond yields dropped to a record low of 4.8 percent last month, according to The Wall Street Journal.

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"The most important question at any point in time is whether to emphasize offense or defense," Howard Marks, chairman of Oaktree Capital Group, told the paper. "This is a time for caution."

With bond yields at historic lows, most market participants predict the next move in rates will be higher.

"We struggle to think we can repeat in the second half of the year what we saw in the first," Edward Marrinan, macroeconomic credit strategist at RBS Americas, told The Journal. "This is where things get difficult, and portfolio managers will earn their keep."

Some experts believe Treasurys will stay in a narrow range for some time. "I don't see a break out until the fall, when the Fed decides whether they end quantitative easing [QE] in October or December," Sharon Stark, fixed-income strategist at D.A. Davidson, told Bloomberg.

"The Fed can be data-dependent between now and the fall. But once QE ends, they've got to telegraph some plan going forward."

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