PhillyDeals: Be cautious about bonds as an investment refuge

AIG goes out of its way to appear grateful for its federal bailout.
AIG goes out of its way to appear grateful for its federal bailout. (MARK LENNIHAN / AP, File)
Posted: January 01, 2013

Stocks in the S&P 500 rose 13 percent in 2012. But many American investors bet the other way, dumping stock-fund shares and investing "astounding" sums in low-yielding bond funds, as if they thought that would be less risky, says Michael Galantino, managing director at investment brokers Boenning & Scattergood in West Conshohocken.

Boenning makes a lot of its money from bond sales. But the big bond pile-on is likely to end badly, Galantino warns.

Sure, Federal Reserve board chairman Ben Bernanke says he wants to keep interest rates near record lows until bosses start hiring again.

Sure, even cash-rich corporations seem to have been waiting, through the fall election and the fiscal-cliff negotiations, to see what Washington will decide about taxes and spending, before committing too much capital for business expansion. Their go-slow approach also keeps rates low.

But when bond rates finally do start moving higher, "the move could be swift," and bondholders will get hit hard, Galantino told me.

Boenning is telling clients that an eventual 2 percent jump in interest rates is likely to knock more than 15 percent off the trading price of existing U.S. Treasury 10-year debt and drive many other bonds sharply lower - chopping billions from bond fund values and punishing investors who saw them as a refuge.

So, he concludes, "it's time to be cautious," which means investors ought to hold five- to seven-year debt instead of longer-term bonds - even if those pay a little more. His firm also suggests investors consider buying "high-quality dividend-paying common stocks" of corporations with "strong balance sheets and respected management."

Nobody went to jail

American International Group says it is buying advertising slots during the NFL and NCAA football games, at newspapers in New York, Los Angeles and Houston (where AIG still has major operations), on morning TV and in the financial press, and on Google's YouTube, all with the message "Thank You America."

The insurer wants to be seen as grateful for its government takeover and taxpayer financing during the financial crisis that began in 2008, when AIG would otherwise have failed. The company was weighed down by its foolish mass guarantees on bonds backed by reckless mortgages, and bad bets on the future direction of interest rates (which also cost AIG clients like the Philadelphia School District millions).

According to AIG, "through asset sales and other actions by AIG, the Federal Reserve, and the U.S. Department of the Treasury, America recovered" public loans and investments totalling "$182.3 billion, plus a positive return of $22.7 billion." This all was capped by Treasury's Dec. 14 AIG share sale.

AIG has shrunk: Employment now totals 62,000, down from a pre-crisis peak of 130,000, says AIG spokesman Jon Diat.

AIG shares have rebounded. Its stock market value has lately topped $50 billion, more than double its level during the crisis, though still off more than $100 billion from the mid-2000s, when it was the largest U.S.-based insurer and one of the widely held Dow Jones 30 industrial stocks.

What's the lesson here? Government help allows a slimmed-down, chastened AIG to continue competing against companies like Ace Group, based partly in Philadelphia and run by former AIG boss Maurice R. "Hank" Greenberg's son-turned-rival, Evan Greenberg. Ace managed to stay solvent without all that government aid.


Contact Joseph N. DiStefano at 215-854-5194, JoeD@phillynews.com, and @PhillyJoeD on Twitter.

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