How Much Higher?

For the market, 1997 had peaks and valleys. What's to come this year?


An institutional money management firm, Mark Lay’s MDL Capital Management made a big crossover move last year, opening up two mutual funds in November–one investing primarily in stocks, the other in bonds. Lay’s done particularly well in the later, logging in a 10.48% gain for 1997 (compared to the Lehman Government/Corporate Bond Index, which rose 9.7%).

Since 1993, his numbers are equally impressive: 53.4% compared to 44.3% for the index. Lay beats the benchmark even though his portfolios are conservative, AAA quality, holding only low-risk Treasurys and some mortgage-backed securities like Ginny Maes.

The bond market.

Lay says investors saw returns as high as 10% in 1997. The bond market looks to have another good year, he says, but gains won’t be as high. Here a few strategies he suggests:

Look for longer maturities.

Lay feels a number of factors are pushing down on interest rates over the next few years. Now that the U.S. government is running in the black with a balanced budget and quite possibly a surplus, rates could well be coming down. “Interest rates will be substantially lower five years from now than they currently are,” he says. “Inflation should remain low and economic growth is moderate, all of which bode well fro long-term bonds.”

How low? Lay says the yield on the benchmark 30-year Treasury could fall as low as 4% in the next few years. So if you’re wary about stock market volatility over the next year, or if you’ve got a specific savings goal ahead and would like to get a good return on your money, he says Treasury bonds maturing in 15-30 years could be a good bet. As of press time, a 30-year T-bond was yielding 5.73%.

Sell off current bonds and buy those with shorter maturities.

Lay says if you’ve bought bonds over the last 12-16 months, it might be a good time to sell and lock in those short-term gains, and reinvest your money in five- or seven-year bonds.

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