NEW YORK (AP) — Bonds aren't doomed.
They lost money last year and still face challenges, but you can still profit from bonds -- just not as much as in the past. So says Ford O'Neil, the lead manager of Fidelity's $13 billion Total Bond fund (FTBFX), whose returns have topped 80 percent of its peers over the last 10 years.
Bonds are supposed to be the safe part of a portfolio, but the Barclays US Aggregate Bond index lost 2 percent last year. Many funds use the index as their benchmark, and it was the index's largest loss since 1994. Rising interest rates knocked down the price of existing bonds last year, and strategists expect rates to move higher as the economy recovers. O'Neil talked about what bond-fund investors can expect.
Q: How fast will rates rise? The yield on the 10-year Treasury is below 2.7 percent.
A: Our feeling is that normalization will take much longer than people expect. That was our view in 2009, when everyone was saying rates would go up a lot, and we've said it for five years in a row because the economy is far more fragile than in prior recoveries.
Q: And normalization means?
A: Normalization means bonds have historically had real rates of 1 to 2 percent and inflation has run between 1.5 and 3 percent ... so the 10-year Treasury at, say, 3 to 4 percent. We think it's a long run to get to the upper end of that range.
We're not expecting economic growth to be 3.5 to 4 percent, the way everyone's grown accustomed to it bouncing back following recessions. We think the economy continues to muddle along for the next two to four years -- not great growth, not bad growth, just kind of 1.5 to 3 percent.
Q: What about inflation, which hurts bond investors?
A: It's going to remain relatively benign for the near future, 1.5 to 2 percent. A lot of that is driven by wages, and wages remain quite stagnant. Of all the companies coming through Fidelity, we don't see any of them pounding the tables saying, "We can't find workers and need to pay everyone a lot more."
Q: Low inflation, a muddling-along economy and a slow rise in interest rates makes it sound like you can still make money with bonds.
A: You can. If you look at the history of bond returns, over the last 60 years, you had negative returns in less than half a dozen years. It's just the nature of the way bonds work. You have that nice income cushion that helps you when you have a rising-rate environment.