The whipsaw correction in the Japanese markets and Federal Reserve Chairman Ben Bernanke's testimony last week prompted investors to reexamine their bond portfolios - particularly municipal bonds - as interest rates threaten to rise over the next 12 months.
We've written about how increases in interest rates could hurt bond prices (as they move inversely) but also want to address questions from readers about muni bonds. Would munis be hurt in price as much as Treasury bonds, for example, when rates rise?
Munis would suffer, but not as much, according to Doug Peebles, the head of fixed income at AllianceBernstein Holding L.P., based in New York. The house view is this: "Yes, we expect interest rates to increase. Has that been built into the bond marketplace? Marginally, yes."
That said, Peebles doesn't expect a "huge" increase. His firm thinks 10-year rates are about 1 percent lower than they would be if the Fed hadn't embarked on its monetary easing policy. When the Fed tightens, they expect interest rates to rise at least 1 percent in the medium term, and then, possibly, to go on rising after that.
AllianceBernstein is largely staying away from very long-term bonds and sticking with shorter duration, meaning five years or less in maturity.
"Muni bonds are somewhat less sensitive" to a rise in interest rates, Peebles explained. However, they aren't cheap, and they are hard to find in the marketplace. "Munis since 2010 had been trading much cheaper than Treasuries, but are now trading at closer to fair value," Peebles said.
AllianceBernstein was a buyer in Apple's recent $17 billion bond issue, one of the largest in recent years. "It may seem huge, but put that in context," Peebles said. "The Fed is buying 10 Apple deals a month" by purchasing $85 billion in mortgage-backed and other fixed-income securities as part of its latest round of quantitative easing.
If you own your business or run a nonprofit, you're probably so devoted to keeping the operation going that you don't have time to figure out what is the best retirement plan.
As a retirement plan sponsor, you might find it easier to just pick your golf buddy's brokerage or someone based on a personal relationship. Bad idea, says Robert M. McDevitt of RTD Financial Advisor in Center City.
He and his firm specialize in advising companies how to determine fees in the 401(k) and other retirement plans they offer employees.
"When the nation moved from defined benefit plans to defined contributions plans, the investment pitch was, we would take charge of our future," McDevitt said. "Why would anyone assume the participants have the time, experience, and analytical tools to become savvy investors and construct, monitor, and manage a properly diversified portfolio?"
McDevitt compiled questions all plan sponsors need to ask their retirement plan adviser:
"What are the weighted average manager fees at the fund level? What share class are you using? Is it the lowest share class available net of any fee reimbursements?
"What are record-keeping fees? Are there 12-b1 fees charged? Are there sub-transfer agent fees? If yes, are these fees passed back to the plan participants as revenue-sharing reimbursements?
"Are you a Registered Investment Advisor (RIA)? If yes, what are your investment management fees? Are you a broker-dealer representative? How are you compensated? Is it through commissions, fees or both?"
If you can't get good answers to these questions, McDevitt says, there is a chance you are overpaying fees in your 401(k) plan.