Stay Ahead of the Yield Curve

09/29/2010 12:00 pm EST

Focus: BONDS

Marilyn Cohen

President & CEO, Envision Capital Management, Inc.

Marilyn Cohen, editor of Forbes Tax Advantaged Investor and president of Envision Capital Management, says investors should start shortening their bond maturities to reduce risk.

Much to my amazement, after its spectacular performance in 2009, the bull cycle for the high- yield bond sector is repeating.

I didn’t think it was likely—possible, yes—but not likely. Just like equity investors have learned [not to] fight the tape, we bond investors know [that] the trend is your friend. Clearly, that is why so many of our recommendations have been in the high-yield space during 2010. The massive refinancing, debt-distribution makeovers, and investor willingness to embrace risk are a few of the reasons why our recommendations have gained traction [in] this “Fat Elvis” corporate balance-sheet sweet spot we’re still experiencing.

“Most Baby Boomers vividly remember Elvis in his prime,” [we wrote back in July.] “[But] as age and some hard living took hold of him, [Elvis] saved his strength and energy. He performed exclusively in Las Vegas. The money kept rolling in; he shunned new endeavors and opportunities.”

“Corporate America appears to be in its own ‘Fat Elvis’ phase. Corporations are satisfied to sit with sedentary cash. They are reluctant to initiate new mergers or acquisitions. There are no share-buyback gyrations. Corporations are fine with their quarterly onstage performances that expend minimal energy. They are fat and satisfied.”

“Stockholders today want their captains of industry to move and shake some of the $1.84 trillion from their treasuries in the form of increased dividend payouts and/or share repurchases. All the while, we bond investors love, love, love this ‘Fat Elvis’ phase of balance sheets bloated with cash.”

I know what it’s like to see bond portfolios erode. Whether it is my own portfolio or client portfolios, it’s painful, anxiety-ridden, and awful. That nightmare is not upon us now. However, the past credit meltdown may have changed your psyche.

These are a few of the reasons why I want you to stay ahead of the curve—the yield curve, that is. Buy bonds with maturities of eight years or less. I am asking—no, demanding—the eight years or less because it is safer and gives you more flexibility to be opportunistic in the future.

Most investors swear if the issuer is good and they collect their coupons over the next 25-30 years, there’s no problem if their portfolio erodes. No problem, I say—until it happens. Then, there’s the anxiety, doubt, and foreboding when the value drops. No amount of “I told you so’s” or advice to “take the losses and move on” will help.

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