Advisers urge bond investors to abandon ship in face of QE2

Quantitative easing causing plenty of unease among clients; ‘interest rates are harder to pick than stocks'

Nov 16, 2010 @ 3:08 pm

By Jessica Toonkel

Financial advisers are using the unexpected jump in interest rates to persuade clients that it's time to get out of long-term bonds.

Last week, the Federal Reserve commenced its second round of quantitative easing in a bid to push mid-and long-term interest rates lower, and thus boost lending and spending. Instead, interest rates have spiked over the past few days, as the Fed has been forced to entice hesitant institutional buyers into purchasing government paper. Nevertheless, prices on longer-term bonds have continued to sag, boosting yields in the process. Indeed, the yield on the 10-year Treasury hit 2.91% yesterday, the highest since Aug. 5.

“Interest rates are harder to pick than stocks,” said V. Peter Traphagen Jr., an adviser at Traphagen Investment Advisors LLC, which has $240 million in assets under management.

Many advisers have been trying for months to persuade clients to bail out of long-term bonds. But investors, still shellshocked from the 2008 market crash, believe long-term bonds means safety.

But with QE2, clients are asking what they should do.

“I just had a conversation with a client the other day about what they should do in response to the Fed's move,” said Nathan White, chief investment officer of Paragon Wealth Management, which manages $65 million in assets.

“I told them that I would rather own a stock where I know the risk I am taking can be higher, but at least I am knowingly taking that risk,” he said.

Paragon has been shifting clients from long-term bond ETFs, like iShares Barclays 20+ Year Treasury Bond ETF Ticker:(TLT), into dividend-paying equity ETFs like the SPDR S&P Dividend ETF Ticker:(SDY).

Similarly, for the past few months Traphagen has started to move its clients' fixed-income allocations from 10-year durations to four- to five-year durations. “We felt that clients were not rewarded enough to go out further on the yield curve and there was a potential that rates may move higher at least in the near term,” Mr. Traphagen said.

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