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Bonds Reverse Course, Outperform Stock Market in 1984

January 4, 1985

NEW YORK (AP) _ Thanks to a strong seven-month rally to close out the year, the bond market turned in one of its best performances in the past decade in 1984, several Wall Street investment firms say.

Taxable bond returns dwarfed those in the stock market, which only a year earlier had outperformed fixed-income investments by a 3-to-1 margin.

Market watchers say declines in interest rates from June through December fueled the closing bond rally, one of the longest in the past decade.

The rally helped erase the negative returns that some long-term issues had recorded during the first five months of the year and transformed them into the year’s biggest winners.

An index of corporate and Treasury issues maintained by the investment firm Shearson Lehman-American Express said bonds provided a total return of 15.02 percent for all of 1984.

That was the third highest rate of return since the index was created in 1972, said George Parthemos, senior vice president and director of taxable fixed-income research at Shearson Lehman.

The only higher returns were the 31.09 percent in 1982 and 15.59 percent in 1976, he said. The Shearson Lehman index recorded a total return of only 8 percent from bonds in 1983.

The total return measures not only income derived from the interest on the security, but also reflects price changes and reinvestment of income. That is the reason returns differ from bond yields, which for long-term Treasury issues, for instance, were 11.5 percent at the end of the year compared with 11.9 percent a year earlier and nearly 14 percent at the end of May.

Parthemos said the bond returns outpaced those available in the stock market in 1984 by a wide margin. He said the Dow Jones average of 30 industrial stocks, for instance, provided a total return of 1.35 percent last year and the Standard & Poor’s 500 returned 6.1 percent. Those returns included price changes and dividends.

Ryan Financial Strategy Group, a financial research firm based in New York, said its taxable bond index recorded a total return of 15.27 percent in 1984. That was the third highest annual return it could find in records dating to 1970, ranking behind the 32.96 percent posted in 1982 and the 16 percent available in 1976.

Sharmin Mossavar-Rahmani, senior analyst for Ryan Financial, said the index advanced every month from June to December. That performance matched a seven- month string of advances which ended in 1976, the longest unbroken streak she could find since 1970.

According to the investment firm Salomon Brothers Inc. of New York, long- term zero-coupon issues were the best performing bond group in 1984 with a return of 17.6 percent. Long-term, top-rated corporate issues returned 16.4 percent, it said, while long-term Treasury bonds returned 14.9 percent.

Shorter-term issues returned less, it said, with intermediate corporates at 14.3 percent and intermediate Treasuries at 14.2 percent. The shortest-term securities provided even lower returns, with three-month Treasury bills at 10 percent and three-month certificates of deposit at 10.7 percent.

But Richard I. Johannesen Jr., manager for bond market research at Salomon Brothers, said the flexible investors who significantly altered the maturity makeup of their fixed-income portfolios at midyear did best.

He said short-term securities returned about 5 percent in the first half, while long-term Treasury bonds produced a negative 7.1 percent return. In the second half, short-term securities did about as well as they had in the first half but longer-term issues did much better.

″Optimally, you would have parked your money in a money-market instrumnent in the first half, and then swung into long-term Treasuries,″ he said.

Shearson’s Parthemos estimated such a strategy could have produced a total return of about 31 percent.

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