January Returns

January was a great month for stocks, but not so great if you were invested in bonds. Here is the tally:

• Treasury: -0.95%
• High Grade Corporate Bonds: -0.72%
• High Yield Corporate Bonds: 1.38%
• S&P 500: 5.18%.

So for the month, stocks significantly outperformed bonds. For the past few years, high yield bonds have closely matched the return of stocks, but so far this year, it has lagged.

The falling prices of Treasury and investment grade bonds have prompted a few strategist calling for the possibility of an unruly exit from bond land.

But an expected shift out of fixed income - particularly top-quality investment grade - and into stocks coupled with a commensurate rise in interest rates and a much more easily traded corporate debt market could send tremors through the space, Bank of America Merrill Lynch said.

"A disorderly rotation out of bonds - characterized by higher interest rates and wider credit spreads - is the biggest risk for investment grade corporate bond investors this year," Hans Mikkelsen, credit strategist at BofA, said in a note to clients. "However, history offers little guidance about how much of an increase in interest rates would prompt such disorderly scenario and how it would play out."

It is certainly possible that Treasury and high grade corporate bonds continue their incremental slide while stocks advance. However, if 10 year Treasury rates were to back up toward 2.5% or even 3% range, it is inconceivable that stocks could act as a shelter for bonds. Most likely, both asset classes would sell of severely. The policies of the Federal Reserve have certainly placed investors, particularly income investors between a rock and a hard place. The extended duration of low interest rates have elevated all asset prices which necessarily usurp future return for the service of our present balance sheet.