Bonds

Yields on 10-year U.S. Treasury Bonds have been trending downward for the past 30 years (1983-2012). In 1983, $100,000 invested in 10-year Treasuries generated $11,100 of annual income. In 1997, $100,000 generated $6,350 in income; in 2012, $100,000 invested in 10-year Treasuries paid out just $1,800 in income each year.

On May 13, 1981, the three-month T-bill rate was 17.01%, when the Dow was under 1,000. During March 2013, three-month rates were 0.12%. When rates do begin to rise, whenever that may be, the over $30 trillion U.S. bond market may be in for a wild ride.

According to Moody’s, the cumulative default rate for high-yield municipal bonds from 1970 through 2011 was 7.94%; this translates into an average annual default rate of 0.19% (7.94/42 years). Over the same period, investment-grade municipal bonds had a cumulative default rate of 0.08% (or 0.002 per year).

Treasury inflation-protected securities (TIPS) are issued by the U.S. Treasury and are designed to keep pace with CPI increases. The first TIPS were issued in 1997. TIPS comprise two parts: a real return and a CPI adjustment every six months. The “moving part” is the CPI change. The “real return” is a locked-in rate that stays the same until the maturity date. Investors earn a fixed rate of interest on an ever-increasing amount of principal.

The long-term default rate for GO bonds, which represents 40% of the municipal bond marketplace, is just 0.01%. According to Municipal Market Advisors, municipal bond segments with the highest default rates are: [1] community development districts (17% of issues), [2] assisted living (5% of issues), [3] independent living (4% of issues), [4] nursing home (3% of issues), and [5] telecom (3% of issues).

From 2008 to 2012, investment-grade and high-yield corporate bond funds doubled in size, to $1.2 trillion and ~ $250 billion, respectively. The U.S. junk bond market is estimated to have an overall value of $1 trillion. Over the past 15 years, the “spread” between high-yield corporates and Treasurys was six percentage points. As of February 2012, the high-yield bond index was yielding 7.3%, far below its 15-year average of 10%.