Viewpoint: Ignore fears of "lost decade" for bonds

Long-term bond rates have risen globally - just a bit - making bond prices fall, hurting bondholders somewhat in the near term.

Yet the media cries it's a lost decade for bonds. Ignore it. No one can make a decade-long forecast. Plus, recent bond volatility is normal.

Investors have terrible memories. It wasn't that long ago we were warned of a "new normal" of slow growth and a lost decade... but for stocks. In fact, we've had non-stop "new normal" headlines for four years. Except new normal didn't happen - the media should apologise, not make yet another long-term forecast.

Those in the media love making long-term forecasts because they're attention-grabbing. More important, they know no one comes back after 10 years to fact check them. Heck, investors don't check back after a few months. It's safe for the journalist, dangerous for you. Long-term forecasts may be fun and easy, but they tell you more what people don't know about markets than what they do.

Whether for stocks or bonds, where markets are 10 years from now has much more to do with supply and demand pressures seven, eight and nine years from now - pressures no-one today has any way to predict, nor have I seen anyone attempt it.

Oddly, "experts" were predicting a lost decade for stocks ahead because, during the 2000s, stocks overall had lousy returns, though with huge volatility. Investors can easily believe what just happened will repeat. Now, just a few weeks of bond volatility has bond fans crying. Six weeks of price/yield movement isn't predictive of 10-year returns. Why would they be? Six weeks of price movement isn't predictive of anything at all, ever.

Recent bond volatility is normal. Yes - bonds are volatile too! Many forget that. Then, too, volatility probably isn't all that insidious. Bonds may be pricing in some potential tapering of quantitative easing (QE) in the US and QE ending elsewhere. That's what markets do. Ending QE should allow long-term rates to rise, markets know it, and they're moving now.

Plus, long-term rates globally have fallen near steadily for over 30 years and can't get much lower - some upward volatility should be expected. But rates needn't rise fast or steadily. They can bounce sideways - they have for the last five years or so, all while people have said yields are too low and must rise. Wrong! Maybe they rise a bit, then bounce sideways.

Both scenarios would surprise those who expect a mirror-image, sharp and long yield rise. This probably won't happen. Bonds, like stocks, tend to do what market-watchers don't expect. We've had a long bond bull market while rates have steadily fallen - people think a long bear must be ahead. Don't be fooled.

Still, recent bond volatility teaches two things. First, bonds are volatile. Amazingly, investors forget that. You can have bond losses, even in super safe Treasuries or gilts. Secondly, long-term investors should prefer stocks anyway. Stocks typically best bonds over long periods. Even if bonds don't have a "lost decade", shares should still hugely beat them over the long term.

If you fear rising interest rates, buy Toronto-based Manulife Financial - which should shine when long-term interest rates rise. It suffered as they fell - clipping both revenue and the stock price. The firm caught the full force of the bear market's downside without the benefit of the bullish upside in the recovery. Now it's cheap at nine times my 2013 earnings estimate and 90% of annual revenue, with a 3.2 % dividend yield.

When agriculture sizzles, Potash Corporation of Saskatchewan should generate major sales growth. It has a hand in all three major fertiliser types, is ultra-low-cost and is the world leader in potash. It sells at 11 times my 2014 earnings estimate with a 3.3 % dividend yield.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.