On June 25th, 2013, we shifted our bond holdings to adapt to a changing rate environment. In response to the anticipation of higher rates, our positions in the bond market were adjusted to focus on short duration bonds and floating rate and senior loans. These instruments are much less sensitive to rising interest rates than bonds with longer duration. Our decision to rotate to shorter duration fixed income exposure was inspired by anticipation that the Federal Reserve would taper its monthly Treasury and Mortgage-Backed Security purchases as soon as September of this year. The market began to price in this possibility as early as May and bond rates have continued increasing since that time. When we shifted client portfolios to lower duration bond exposure, the 10 Year Treasury rate was 2.60% and the 30 Year Treasury rate was 3.60%. As of market close on August 22nd, the 10 Year rate is up to 2.90% and the 30 Year rate is at 3.88%. We expect this trend to continue in the long run and are exploring additional options in the fixed income space that will provide a premium moving forward as bond yields continue to increase and, consequently, bond prices continue to decrease.

We specifically want to address the rotation out of longer duration and higher yielding bonds and into short duration bonds and floating rate and senior loans. The table below summarizes the total return of a number of bond ETFs over the time period discussed above. Total return includes both the yield (or coupon payments) and the price return of the bonds themselves. We shifted our clients from longer duration Treasuries (rows 2 and 3 of the table below) into 1-3 Year Treasuries (row 4) and Senior Loans (row 5). Since June 25th, the 20+ Year Treasury Bond fund has continued to slide, while the Senior Loan portfolio has continued to generate positive returns.

Security Name


Price on June 25th, 2013

Price on August 22nd, 2013

Total Return

iShares Core Total US Bond Market ETF





iShares Barclays 20+ Year Treas Bond





iShares Barclays 7-10 Year Treasury





iShares Barclays 1-3 Year Treasury Bond





PowerShares Senior Loan Port





On the year, bond funds have faced significant downward movement.  The hardest hit sectors of the bond market have been the longer-term maturity funds due to the spike in the 10 and 30 Year Treasury rates.  The table below shows the year-to-date (YTD) and three month returns as of August 29th, 2013 for just some of the most commonly-held bond funds: 

Security Name


YTD Return as of 8/29/2013

3 Month Return

Vanguard Long-Term Bond Index Inv




Vanguard Long-Term Treasury Inv




Fidelity Spartan L/T Tr Bd Idx Inv




Vanguard Interm-Term Bond Index Inv




It is not just the longer-duration bond funds that have been negatively affected by this increase in interest rates over the last nine months.  Several high yield funds and actively managed bond funds demonstrated mediocre performance, at best, YTD, and many of them have seen negative returns over the past three months. The table below shows a variety of bond funds and their YTD and three month returns:

Security Name


YTD Return as of August 29th, 2013

3 Month Return

PIMCO Total Return A




PIMCO Real Return A




Vanguard Inflation-Protected Secs Inv




Fidelity Advisor High Income A




Vanguard High-Yield Corporate Inv




PIMCO Credit Absolute Return A




Templeton Global Bond A




Fidelity New Markets Income




The current rate environment has created an uphill battle for those tasked with providing a premium in the bond market. We at the Legacy Foundation believe the bond market, in the two months, will face increased volatility in the face of the Federal Reserve tapering its current bond purchase and with the high likelihood of yet another debt ceiling battle on Capitol Hill. These two topics are outlined in separate articles on our website. The links for these articles are at the following:

In order to capture slightly higher yields, we have added to our position in high yield bonds.  We plan to keep most of the remaining bond allocation in relatively short duration bond funds until these events transpire. If bond yields decline due to the debt ceiling debate, an attractive opportunity in an inverse long term treasury position is likely.

Once the events described above completely unfold, we plan on initiating new positions in unconstrained strategic bond funds that have the ability to move in and out of attractive sectors within the bond universe. These funds will provide the higher yield that is desired for income purposes while managing the downside risk bonds face due to increasing interest rates.  We also plan to initiate a position in alternative assets that are lowly correlated with both the equity and fixed income markets.

If you have any questions, please feel free to email aradcliffe@www.yourlegacyfoundation.com or dsandberg@www.yourlegacyfoundation.com.