Friday, February 13, 2015

Bond Investors Should Take a Page Out of LeBron James's Playbook


Bond investors who are trying to figure out their investment choices would do well to study NBA star LeBron James, according to Michael Lewitt at The Credit Strategist

To much fanfare, LeBron James is returned to his home state of Ohio to play for the Cleveland Cavaliers. But it’s not his choice of teams that makes him such a good role model for bond investors — it’s the contract he signed, according to Lewitt.

James agreed to a short-term two-year deal, which is expected to help net him more money when he renegotiates down the line, given a new NBA television deal that’s in the works.

Currently, corporate bond investors are staring down paltry income from bonds as buyers pile into the market amid low interest rates. Recently, the 10-year Treasury note traded at a yield of 2.2%.

But, like LeBron, bond investors could see a bigger payout ahead, given the strong possibility that rates could rise.

Lewitt says, "The most likely course of events over the next two to three years and then the next three to five years is higher market volatility as a result of rising rates. This will create the opportunity for investors who have planned properly not only to avoid large losses (both realized and unrealized or mark-to-market) on their bond portfolios, but to be positioned to take advantage of the opportunities that market dislocations will create."

So what’s a bond buyer to do? Like LeBron’s contract choice, they should go short-term.

"Investors would be wiser to follow LeBron’s example and keep the duration of their commitments short.