Thursday, September 4, 2014

Is Morgan Stanley Advocating Tactical?

Morgan Stanley Braces for Seven Years of Bond Losses

According to this article in Bloomberg yesterday:

Morgan Stanley (MS) Wealth Management’s Jonathan Mackay predicts the securities will post annual returns of between 1 percent and 2 percent for the next seven years -- which means you’ll lose money after accounting for inflation. That’s a big shift considering the debt gained 8.7 percent annually on average in the 30 years through 2012.

 Investors should “have a lower average allocation to bonds than you would have in the previous cycle because they just don’t provide the income and return,” said Mackay, senior market strategist at Morgan Stanley’s $2 trillion wealth management unit. While central-bank stimulus is supporting bond values, “the collateral damage is going to be lower portfolio returns.”
For a moment it almost seemed like Morgan Stanley was advising clients to take a tactical approach to their portfolio instead of the stick your head in the sand and have an allocation to bonds based on how conservative you are because bonds always make money (even though it is mathematically impossible for bonds to have the kind of run they have had over the past 30 years).  But then he ruined it by saying:

 The way to get around this is to buy higher-yielding assets, he said. While higher-rated bonds have been outperforming their riskier counterparts in 2014, that may be poised to reverse.
So still somewhat of a tactical approach since he is advocating moving out of lower yielding bonds into higher yielding but instead of reacting to the market (like buying low yielding Treasuries now because they are in an uptrend) he is advocating blind faith that higher yielding bonds will do better than lower yielding.  Maybe, maybe not.

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