From a November 28th, 2009 Financial Post article titled “Now is No Time to Learn Pitfalls of Bond Market”. 

Article Summary:

-Lisa Myers, lead manager of Templeton’s flagship Templeton Growth Fund warns that now is not the time to increase your bond weighting. 

-Interest rates are at all-time lows and have nowhere to go but up

-There is an inverse relationship between interest rates and bonds

-The past 30 years have been favorable for bonds as interest rates have mostly fallen, therefore bond prices rose.

-Balanced fund managers are reducing their weighting in longer-term bonds to mitigate this interest rate risk.

Comments:

-As explained in the article, bonds have negative relationship with interest rates.  Given where we are with interest rates, it is understandable to have a weary outlook for bonds moving forward. 

-There have been a lot of articles written about inflationary concerns and what will happen once interest rates start rising again.  This is partly why gold has risen to record levels, due to its strong correlation with inflation. 

-Certain fund managers are starting to recommend real-return bonds (where the rate of return is adjusted for inflation) as a good fixed-income solution to a possible rising interest rate / inflationary growth environment.

-Fund managers are still pointing to the favorable yield spread between corporate bonds over government bonds.  Corporate bonds tend to be less sensitive to interest rate changes than government bonds.

-For those looking for higher yielding income solutions, in the past year, CI Investments, Mackenzie, and Dynamic Funds have all introduced some type of “Strategic or Diversified Income Fund”.  The objective of these funds is to seek income from the most attractive opportunities in corporate bonds, income trusts, infrastructure, and high-yield equities.  As market conditions change, managers have the flexibility to move in and out of these assets as they see fit. 

The link below provides 5-minute outlook on bonds given by John Braive, Vice-Chairman CIBC Global Asset Management in November 2009.  He goes over a lot of the issues discussed above.

Bond Outlook