Institutional and individual investors failed to fully enjoy the recent bond rally because of poor market timing, according to an analysis by David L. Babson & Co., New York.
Long-term bond prices fell 26% to a low in the fall of 1994 from their market peak in October 1993. Even the less volatile intermediate sector fell 19%.
The market decline was accentuated by heavy liquidation of bond mutual fund shares by individual investors and by the unwinding of speculative excesses on the part of professional buyers, according to the Babson & Co. report.
Individuals were enthusiastically putting money into bond funds throughout 1993 as declining interest rates pushed bond prices higher and low money market yields pressured many investors to move elsewhere. But investors turned to heavy selling after rising rates had driven prices down substantially.
"This was the classic mistake of buying high and selling low," the analysis said.
Of course, the selling occurred at the very time when bonds were at their most attractive valuation levels in many years.
Now that the bond market has staged a strong recovery, individuals have stopped their retreat from bond funds, "again reacting to events much too late."
