Bonds have Vanguard CEO thinking of 1999

Fixed income looks like stocks just before lost decade, McNabb says

By Jason Kephart

Jan 8, 2013 @ 1:11 pm (Updated 11:29 am) EST

McNabb: Bond bubble about to burst.
McNabb: Bond bubble about to burst. Bloomberg

When Bill McNabb, chief executive of The Vanguard Group Inc., sees the valuations and yields available in fixed-income today it takes him on a trip down memory lane. Unfortunately for bond fund investors, it's not a particularly rosy memory.

“You could argue it's almost as extreme as stocks were in 1999,” Mr. McNabb said during an interview last week. That year, the price-earnings ratio for the S&P 500 index bubbled up to more than 30 as stocks careened toward the tech bubble crash. The following decade was a dubbed a “lost decade” for equities as the S&P 500 had negative annual returns.

Mr. McNabb isn't predicting that bond funds will suffer the same fate over the next 10 years, but he is warning clients that they need to reduce their expectations.

“It's always dangerous to predict returns, but the probability of bonds having the same return over the next 10 years as the last 10 is almost zero,” he said.

That doesn't mean he's advocating throwing bonds out of a portfolio or replacing them with riskier assets with higher yields.

“Bonds are still a great diversifier of equities,” he said. In fact, Vanguard contends they're actually the best diversifier of equities in times of market stress.

The diversification benefits never been more costly, though. The 10-year Treasury is still yielding less than 2% and the Dow Jones Corporate Bond Index is trading at a record high of 115.

That means returns on the classic balanced portfolio, with a 40% allocation to bonds, are inevitably going to be lower. Mr. McNabb said investors can expect closer to a 5% return from the 60/40 mix of stocks and bonds, down from the historical average of about 8%.

  @IN Wire

Apr 22 07:49PM
I really hope this doesn't mean every Pearl Paint store is closing. http://t.co/I9h2gMoCEu
Apr 22 07:23PM
The 5 Types of People You're Likely to Unfriend on Facebook http://t.co/VB6C2Bs0oU

Top-producer earnings

Average annual payouts for top-quartile reps at independent broker-dealers

Top 5 Firms

Microsoft JScript runtime error '800a139e'

Exception thrown and not caught

/InvestmentNews/broker-dealer-data/scripts/json2.asp, line 478

Most Watched Video

7:12The 2 biggest factors driving growth in active ETFs

Ugo W. Egbunike Dir. Of Business Development, ETF.com Greg Crawford Deputy Editor, InvestmentNews

Video Spotlight
1:47People are Living Longer. Good News or Bad News?

Sponsored by Oppenheimer Funds Inc.