Yeske Buie in the Media: A Close Bond?

CNBC recently shared an article questioning Americans’ relationship with bond funds which they claim to be “America’s favorite investment.” The article argues that while bond funds have been growing in popularity due to their simple, cheap, and diversified nature, the projected increase in interest rates may make them a less desirable investment over the coming year. To gain a broader opinion on the argument, a number of prominent financial professionals including Dr. Dave Yeske shared their opinions with CNBC. Here’s what Dave had to say about Yeske Buie’s opinion of bond funds:

• Regarding the Projected Increase in Interest Rates
  • CNBC: “For the first time in a very long time, it appears that interest rates are headed higher. Inflation remains below the Federal Reserve’s target of 2 percent, but it is rising and there is growing expectation that it will soon become something more to fight than to hope for. The Fed seems convinced. Last month it raised rates a quarter point, to the range of 1.50 percent to 1.75 percent, and is telegraphing at least two more rate hikes this year. While 10-year bond prices have recovered slightly from their fall early this year, most analysts expect the 10-year yield to continue moving higher and to finish the year above 3 percent.”
  • Yeske Buie: “‘We think rates may finally march upward from here,’ said David Yeske, co-founder of investment advisory firm Yeske Buie.”
• Regarding the Advantages of Bond Funds
  • CNBC: “The growing popularity of bond funds for investors is due to the simple fact that they are the simplest, cheapest way for investors to buy a diversified basket of bonds. Investors can buy the broad market of government and corporate bonds, they can target international fixed-income markets, or they can invest in slices of the market or sectors therein. Bond funds offer a degree of diversification that only large scale can bring.”
  • Yeske Buie: “’We think it’s imperative to be diversified with bonds if you want more than just Treasurys,’ said Yeske. “Bond funds can give you a globally diversified portfolio at a low cost.’ Yeske currently has his clients’ bond allocations parked in funds with a duration of only one year, and he never stretches beyond three to five years’ average duration. ‘Our view of the role of bonds is as a stable reserve of value,’ he said. ‘We’re looking for low volatility.’”
• Regarding Costs to Bond Fund Investors
  • CNBC: “Unlike the stock market, transaction costs in the bond markets are very high, depending on the broker you purchase them from. With yields as low as they are now, the costs of building a bond portfolio can consume much of the income generated.”
  • Yeske Buie: “‘No individual investor I work with has the scale of the bond fund manager we work with,’ said Yeske at Yeske Buie. He suggests that investors who need to sell portions of their bond holdings for income can do it more efficiently by investing in multiple bond funds of staggered duration. ‘Depending on the rate environment, you liquidate the one that has been hit the least by rising rates,’ Yeske said. He also argued that bond funds are not a trap in a rising rate environment. While their bond holdings can fall in value as rates rise, they are constantly reinvesting the proceeds of maturing bonds into higher-yielding replacements. That means income generated from the fund increases more versus a static portfolio of bonds.”

Read the full CNBC article here: Americans love bond funds, but will funds love them back?