As can be seen in the attached table, long-term interest rates have risen for five or more consecutive calendar quarters only 10 times over the last 87 years. Expanding the period to six consecutive quarters of rising long-term rates, there have only been four occurrences. Indeed, the largest number of quarters where long-term rates rose lasted seven quarters and has happened only once since 1926.
Why is this important? The most recent rise in interest rates was the second most devastating in the last 87 years. Only once have we experienced seven consecutive calendar quarters of increasing interest rates and that was followed by a 15 percent bond return in the next year.
Based on history, long-term interest rates look very attractive in 2014. There is a 60 percent chance that investors will experience a double-digit positive total return in long-term bonds this year. Alternately, there is less than a 20 percent chance that these total returns may be negative.
Those who fail to rebalance and include long-term bonds in their portfolio for 2014 could be disappointed. In my opinion, a barbelled strategy comprised of 40 percent, two-year and 60 percent, 30-year securities should produce the best risk-adjusted returns, while intermediate maturity bonds of five to 20 years should be avoided.
To learn more about how you can actively position your portfolio for the most attractive risk-adjusted returns, contact your financial professional.
George W. Karpus is chief investment strategist and chairman of the board of Karpus Investment Management, an independent, registered investment advisor that manages assets for individuals, corporations and trustees. Offices are located at 183 Sully’s Trail, Pittsford, N.Y. 14534; phone (585) 586-4680.