AdviceIQ: The long bond rally lives on

For the past five years, prognosticators, legendary fund managers and other savants have predicted the end of the incredible 30-year bull market in U.S. Treasury bonds. Odds are, though, that it won't stop soon, thanks to Treasuries' status as a refuge in a turbulent world and the Federal Reserve's ongoing interest in avoiding an economy-jolting rate shock.

Whether that's a good thing is another question. What's for sure is that reversing the momentum of a longstanding trend of lower bond yields is not easy.

Since 1980 bond yields have fallen on 10-year U.S. Treasury notes -- from 15% to the present level of 2.5%. When interest rates fall, that means a rise in the value of the bonds, and not just Treasuries. Investment-grade corporate bonds and home loan rates, which are keyed to the 10-year Treasury, will follow along.

Market returns tend to revert to the mean – for the 10-year note since 1962, that is around 7.5%. If yields jumped up reaching the 4%-5% level that many consider appropriate for this economy, prices would plummet and crush all bondholders. The sensitivity of bond prices to rate changes is measured by a concept called duration. Right now, the Barclays U.S. Aggregate Bond Index, the broadest benchmark for fixed-income (it includes Treasuries, corporates and mortgage-backeds), has a duration of 5.7 years. So if rates rise one percentage point, prices fall 5.7%.

What are the chances of a huge rate hike happening? Not likely. Reported inflation is low, and thus market pressures for an increase in yields are nonexistent. And the Federal Reserve has pledged to keep short-term rates, which it largely controls, low well into 2015 to bolster the sluggishly growing economy.

While short-term rates do not dictate longer yields, they do have an influence, which the Fed has appreciated for some time. Since 1988 the Fed has been on a path of guiding the U.S. economy by way of monetary policy, primarily via interest rates.

After the last recession, the Fed did so much more than change interest rates. Starting in late 2012, it embarked on the latest round in its bond-buying program, which focused on Treasuries. That ballooned the central bank's balance sheet to $4.4 trillion from $900 billion pre-crisis.

Now, Fed Chairwoman Janet Yellen intends to end this program in October. Yet she has given no indication of selling off its vast Treasury holdings anytime soon. Doing so would send prices down and yields higher. Some speculate that the Fed may even buy new Treasuries to replace ones that mature.

Every time the U.S. government holds a debt auction in recent years, the Fed purchased at least 40% of the bonds. Under the surface, today's bond market has one main buyer driving it – and the rest of the buyers and existing bondholders are just along for the ride. With its unlimited ability to buy U.S. Treasuries at will, the Fed can keep this going a bit longer than could be expected, perhaps another year or so which will only make the day of reckoning worse.

Meanwhile, every time there is turbulence overseas, foreign buyers crowd into Treasuries because of their perceived safety. In mid-2012, for instance, during Europe's sovereign debt crisis, such flight to safety sent 10-year notes down to just below 1.4%. Conflict is rife around the world, from airstrikes in Syria to tanks in Ukraine; all provide an ample appetite for Treasuries into the future.

Don't let these historic paltry yields on your bond holdings allow you to get tricked into moving assets that should be in some form of fixed income or cash into more risky investments. Many institutions and individuals, in the chase for higher yields, find themselves placing money into equities or exotic fixed-income-type investments – as the interest rates the Fed creates squeeze pensioners and savers everywhere.

You can tactically reposition a portion of your bond portfolio into some equities and fixed-income type investments. The majority of your bond holdings need to stay in bonds or cash at a credit risk quality equal to the bonds that you might sell.

Walid L. Petiri, AAMS, RFC, is chief strategist atFinancial Management Strategies in Baltimore and a member of the AdviceIQ Financial Advisors Network, which is a USA TODAY content partner offering financial news and commentary. Its content is produced independently of USA TODAY.