Investors who had been "going for the yield gusto," as she put it in a phone interview with AdvisorOne, can expect more pain ahead. "People who went long haven't gotten their clocks cleaned yet, but they're not ticking like they were," she said.
The biggest — but not the only — factor in the rise of bond vigilantes, according to Cohen, is the failure of QE2. She notes that the Fed's moves to push long-term rates down occurred as other central banks raised or at least maintained stable rates. The result is "a national balance sheet that is overleveraged, and China has made it clear that they are not happy with us. You still have states, cities and counties in fiscal messes. You tell me what's going right." Parallel problems in Europe — German bonds have been taking a big hit too — highlight the credit erosion that bailing out fiscal failures causes.
These mounting pressures did not get in the way of a two-year bond rally ending with the recent mid-term elections, but Cohen argues that unsophisticated investors fueled much of that rise. "The massive amounts of money going into the bond market was due to a stampede out of stocks. 'Get me out of stocks. I want bonds.'" Look to Thursday's flow of funds data to see just how fickle these investors are.
Going forward, Cohen advises keeping durations from one to two years. And she says bond investors should look for opportunities in corporate bonds — specifically corporations with good balance sheets, with lots of cash and with management that's not looking to finance acquisitions with debt.
According to Marilyn Cohen (left), veteran Forbes columnist and founder of Envision Capital Management, "this bear market is just getting going."
