Morgan Stanley (NYSE:MS) brace itself for bond losses!

Investment grade bonds now come with a grim forecast attached with them. Seven years will go by before you can make any money on them again. Jonathan Mackay from Morgan Stanley (NYSE:MS)’s Wealth Management department is predicting for the investment grade bonds to post 1-2% of annual returns. If you account for inflation this clearly means that you would be losing money on these bonds. Considering the average annual return of 8.7% in the last 30 years leading up to 2012, this is a tremendous drop.

Mackey, who is the senior market strategy officer at the $2 Trillion department of Wealth Management, tells investors to have a lower allocation as compared to the previous year for bonds as they don’t provide a competitive income and return. However, bond values are being supported by central-bank stimuli but what suffers most will be the expected portfolio return.

As suggested by him, to counteract the scenario higher-yielding assets should be purchased. The trend in 2014 which is set to be reversed is that high-rating bonds are performing great as compared to the risky counterparts. Now movement should be towards high risk high return securities.

Yields are now falling…

A report released yesterday by a team of Bank of Americas’ (BAC:US) analysts being led by Michael Hartnett claimed that 45% of all the government bonds in the market are now yielding even less than a 1% annual return. The banks (BAC:US) ML index (global corporate) gained 6.5% this year but the notes yields have fallen to 2.6% which is well within 0.17% of last years’ record low.

Investors reaction was a predicted move towards junk bonds, equities, private equity as well as real estate to make up for this loss in bond return. Boosting leverage is another trick to increase returns using credit lines as well as credit-default swaps.

After three years, bet outstanding on the credit-swap index, which is tied to the North American junk market, is now soaring. According to Bloomberg (BMSX:IND), the net wagers (NA High Yield Index) rose to dollars 34.4 Billion on 29^th August comparable on the same market CDX to dollars 29.1 Billion last March.

Extreme pride doesn’t go unpunished by the Gods

Somehow all the risk taking prevailing in the market has been giving high returns. Credit investors are ignoring the geopolitical unrest prevailing around the world. The global trend for the high yield bonds seems to be an annual gain of 8.9% according to the BoA (BAC:US) ML index.

Making reckless decisions for a high yield doesn’t appeal to just about everyone. BoA (BAC:US) analysts said yesterday regarding bond buyers that they should be careful not to indulge in investor hubris at a time when the FR is all set with a mindset to stop the monthly asset buying.

When choosing between losing money and extreme self-confidence, investors would always take the risk of making money, even if it comes with a probability of Gods punishing your stock market recklessness. That is good news for the stock market.