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Posted by on Apr 25, 2014 in Laif Meidell

Convertible bonds best performers once again

Convertible bonds best performers once again

By Laif Meidell, CMT, president of American Wealth Management, and portfolio manager of the AdvisorShares Meidell Tactical Advantage ETF (MATH)

Convertible bonds remained at the top of our list for a second week with the Barclays U.S. Convertible Bond Index gaining 0.82 percent over the past five trading days. As I’ve discussed in this column in the past, convertible bonds quite often move in harmony with the stock market, so it’s no surprise that convertible bonds are higher with the Standard & Poor’s 500 gaining .87 percent over the past five trading days.

High-quality international corporate bonds finished second-highest on our list this week, with the S&P Internationals Corporate Bond index gaining .39 percent this past week.

However, the new kid on the block, when it comes to weekly top performers, is U.S. Treasury Inflation Protected Bonds, or TIPs as they are commonly called. The Barclays U.S. Treasury Inflation Protected Bond index has gained 0.24 percent over the past five trading days and is up 1.66 percent over the past three months. TIPs are considered an extremely low-risk investment since they are backed by the U.S. government. However, they are a unique animal from the standpoint that they not only pay a dividend (although it’s typically small), they also appreciate in value semiannually with inflation as measured by the Consumer Price Index (CPI). As such, TIPs can have a dual role in an investor’s portfolio, either providing asset protection as a treasury bond or as an inflation hedge due to their link to inflation.

The question of the week is, which role is TIPs filling for investors and what does that mean about the economic environment we are in? With short-, intermediate and long-term treasuries down over the past five trading days, it seems more likely that TIPs are being sought-after as an inflation hedge. Although supporting evidence for this idea can be seen in the general increase in commodity prices over the past three months, on April 15 the CPI for March rose to 0.2 percent, topping expectations. The question now remains whether the recent strength in commodity prices is a result of tensions in the Ukraine, the early stages of a strengthening global economy or both.

This commentary originally published in the Reno Gazette-Journal.
Performance numbers used in this article were obtained through eSignal and are not guaranteed to be accurate.

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