Friday, May 21, 2010

US Corporate Bonds Are Holding Up

The US stock market is down about 10% in the last month, and before today’s bounce, non-US stocks were down about 15%. This is nothing compared to the 50%-60% drop in 2008-2009, but another difference is that US corporate bonds have not dropped along with stocks. This is one indicator that the fears of today are nothing like the panic of the 2008-2009 financial crisis.

You may want to see this for yourself by looking at a few charts using Enter ticker symbol VTI, which is the Vanguard Total Stock Market ETF, click GET QUOTES (or just press Enter), then click on the chart on the right of your screen. Select Interactive in the Charts section of the navigation bar on the left, then select 2Y (2 years) in the time range bar just below the chart grid. If this seems too complicated, this link will take you to the chart.

Now click COMPARE, just above the chart grid, then select S&P 500 (ticker symbol ^GSPC), then click Draw. The chart will now display changes in percent. Note that both VTI and the S&P 500 fell over 50% from May 2008 to March 2009. To include non-US stocks in our comparison, click COMPARE, type VEU, then click Draw (or use this link). VEU is the ticker symbol for the Vanguard ETF that tracks most non-US stocks. Note that these stocks fell even more during the big downturn.

To add in an investment-grade bond fund to the comparisons, click COMPARE again, and type VFICX (Vanguard Intermediate-Term Investment-Grade Bond fund) in the text box, then click Draw (or try this link). Note that VFICX fell about 15% between May and October of 2008. While not nearly as dramatic a fall as for stocks, it was disconcerting to have your bond fund falling at the same your stock funds were falling.

Now switch the time range to 1 month (click 1M in the time range bar just below the chart grid); or just try this link . Note that while VTI and the S&P 500 fell about 10% in the last month, and VEU (non-US stocks) fell about 15%, the intermediate-term investment-grade bond fund VFICX barely budged.

This tells me that although investors are spooked by the situation in Greece, etc., they aren’t worried that the financial system is in danger of collapsing. More importantly, this is providing an example of how bonds often are not correlated with stocks (they don’t move up and down together), thus giving us the diversification benefits of including the fixed-income asset class in our portfolios, while providing a higher yield and higher expected return than cash.

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