July 4, 2014

The founder and CEO of Kessler Investment Advisors is sticking to his guns and maintains that U.S. Treasury bonds will continue to be a major beneficiary.

Consuelo Mack: This week on WealthTrack, marching to the beat of a different drummer. While most of Wall Street has been preparing for rising interest rates and faster economic growth for years, Great Investor Robert Kessler has stuck to his low interest rate, slow growth theme… Kessler Investment Advisors’ Robert Kessler is next on Consuelo Mack WealthTrack.

Hello and welcome to this edition of WealthTrack, I’m Consuelo Mack. How many times in recent years have you heard money managers, financial advisors and economists say that interest rates are about to go up? And therefore advise you to shorten the maturities in your bond portfolios because long-term bonds, treasury bonds in particular are very sensitive to changes in interest rates. When interest rates go up, bond prices decline. When interest rates decline bond prices go up. That sensitivity has worked mostly to bond investors’ advantage over the last 30 plus years. Interest rates on 10-year U.S. Treasury notes, for instance have declined from a high of close to 16% in 1981 to a low of 1.4% in 2012. Treasury bonds have been great investments throughout. The yield has stayed near historic lows ever since.

What happens if rates start to go up? Here’s a chart from Altegris Advisors showing the impact on different types of bonds if interest rates rise one percent.

Prices of high yield corporate bonds would decline about 4%,.. Emerging market bonds would suffer about a 6% hit,… U.S. investment grade corporate bonds would experience a 7% fall ,… 7-10 year treasuries nearly 8%… And long term treasury bonds would plummet more than 16%- ouch!

Many pros have warned of that danger on this program for years now, including most recently Templeton Global Bond Fund’s Michael Hasenstab.

There has been one consistent hold out on WealthTrack over the years, who has stuck with his low interest rate theme and U.S. Treasuries. He is this week’s Great Investor guest. Robert Kessler is the founder and CEO of Kessler Investment Advisors, a manager of fixed income portfolios specializing in U.S. Treasuries, for institutions and high net worth individuals globally. For the 15 years that I have been interviewing him he has correctly predicted that interest rates would fall, then remain low and that U.S. treasuries would perform well. I began the interview by asking him why rates have stayed so subdued for so long.

ROBERT KESSLER: Let me say that I think when we talk about so long, you’re talking about a period of time from the beginning of the ‘80s until now, and so we consider that a very long period of time. The fact of the matter is we had very low interest rates from the early ‘30s until the ‘60s. So this is not an unusual situation, and also in global economies, free enterprise systems, capitalism, there’s always this pressing for lower and lower costs and lower and lower rates. It’s the nature of a good market system which we’re in.

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