MARKETS

Last week, you read about big stock experts reflexively hedging their bets after the Dow's record high. Now, it's time for caution from gurus in another, slightly more expected asset class, writes MoneyShow's Howard R. Gold, also of The Independent Agenda.

Are you one of the millions of Americans who poured their money into bonds over the past five years, and now are nervous that rates will rise? Well, you’ve got company—the managers of the very funds in which you’ve invested.

Two managers of leading bond funds I spoke with have moved to protect their shareholders from what they view as a gathering storm. They have shortened maturities, lightened up on some overpriced sectors, and have gone far afield—outside the US—for decent yields with lower risk.

The problem, of course, is a three-decade-long rally in the bond markets, which has driven rates way down, combined with a Federal Reserve that has gone way beyond its usual rate-cutting toolbox by adding more than $2 trillion to its balance sheet. That helped push the ten-year Treasury note to its lowest yield ever—1.38% last July.

But while stocks have rallied, bond prices slipped and yields (which move in the opposite direction of prices) rose. On Wednesday, the ten-year yielded 2.02%, a big move from the lows.

And there may be many more rate increases to come.

“We’re at the end of a long-term run…,” said Thomas Carney, manager of the Weitz Short-Intermediate Income Investor Fund (WSHNX), which has $1.45 billion in assets. “If this is a baseball game, we’re in extra innings.”

And Matthew Eagan, who co-manages the giant $22.7 billion Loomis Sayles Bond Fund (LSBRX) along with the legendary Dan Fuss, told me: “We see us entering a period where rates are going to rise on a secular basis"—meaning a long-term change.

And although it probably won’t look like Apocalypse Soon, Eagan sees a steady drip, drip, drip of misery ahead for bond investors. “Nobody knows for sure, but my guess is it will be many, many years of rising rates,” he told me.

That’s very bad news for people who loaded up on bonds without realizing they can actually lose money when rates rise.

Some bonds are more vulnerable to rate increases than others. That’s why I called Treasuries, Treasury Inflation Protected Securities, and high-yield bonds the three most overvalued assets in this column last September.

Neither Carney nor Eagan is a big fan of Treasuries now. Investors have been losing money in Treasuries since July, Eagan told me. “These are bonds that are very sensitive to interest rate risk,” he said.

He’s even less enthusiastic about TIPs, Treasury securities that embed investors’ expectations of future inflation.

“If inflation is stable and Treasury yields go up, you lose,” he said. “If you give it enough time, you’ll lose all your purchasing power.”

That leaves us with corporate bonds, whose yields also are—are you tired of hearing this?—coming off record lows after companies rushed to issue debt at historically cheap prices.

NEXT: The Most Vulnerable Bonds

Tickers Mentioned: BIV, BSV