TD Ameritrade Is Bearish on Bonds

Tuesday, 05 Feb 2013 07:45 AM

By John Morgan

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Broker TD Ameritrade issued a warning to its customers about the bond market, saying they should beware potential losses from a rise in interest rates.

In a note to investors titled “Bonds Are Not Gravity-Defying: Be Prepared,” the broker noted that while elevated bond prices have boosted fixed-income returns over a multi-year stretch, future returns could be at risk.

TD Ameritrade CEO Fred Tomczyk echoed that warning at the firm’s annual conference, Investment News reported.

Editor's Note:
Billionaires Dump Stocks. Prepare for the Unthinkable.

“Too many people think [bonds] are like a CD — they put in $100,000 and they’ve always got $100,000,” he said. But when rates go up, investors will experience losses, he told Investment News.

“I’m worried about it. People tend to come back [after a loss] and say, ‘You didn’t tell me,’” Tomczyk said.

TD Ameritrade said investors should be cautious about individual bonds, bonds funds and bond exchange-traded funds (ETFs).

“As markets go, bonds prices are unlikely to stay this high indefinitely and interest rates probably won’t remain at unsustainable 40-year lows,” the note to investors stated.

Craig Laffman, director of fixed income trading and syndicate at TD Ameritrade, urged investors to pay special attention to liquidity with bond ETFs.

“The market for the individual [ETF] securities could dry up, affecting the price at which clients can sell,” Laffman said. “Depending on the overall market, investors can experience a fair amount of price volatility when trading these securities.”

Individual bond holdings stand to lose value in a rising-rate environment, TD Ameritrade warned. And bond mutual fund holders should “keep in mind that their exposure may be less obvious, considering there’s no stated maturity to the holdings in a fund,” the broker said.

Investment News reported that Tomczyk predicted short-term rates would not rise for several more years, but that he believes long-term rates could be another matter if the Federal Reserve eases its bond-buying programs.

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

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