Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Friday Stock Market CRASH Following Israel Attack on Iranian Nuclear Facilities - 19th Apr 24
All Measures to Combat Global Warming Are Smoke and Mirrors! - 18th Apr 24
Cisco Then vs. Nvidia Now - 18th Apr 24
Is the Biden Administration Trying To Destroy the Dollar? - 18th Apr 24
S&P Stock Market Trend Forecast to Dec 2024 - 16th Apr 24
No Deposit Bonuses: Boost Your Finances - 16th Apr 24
Global Warming ClImate Change Mega Death Trend - 8th Apr 24
Gold Is Rallying Again, But Silver Could Get REALLY Interesting - 8th Apr 24
Media Elite Belittle Inflation Struggles of Ordinary Americans - 8th Apr 24
Profit from the Roaring AI 2020's Tech Stocks Economic Boom - 8th Apr 24
Stock Market Election Year Five Nights at Freddy's - 7th Apr 24
It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- 7th Apr 24
AI Revolution and NVDA: Why Tough Going May Be Ahead - 7th Apr 24
Hidden cost of US homeownership just saw its biggest spike in 5 years - 7th Apr 24
What Happens To Gold Price If The Fed Doesn’t Cut Rates? - 7th Apr 24
The Fed is becoming increasingly divided on interest rates - 7th Apr 24
The Evils of Paper Money Have no End - 7th Apr 24
Stock Market Presidential Election Cycle Seasonal Trend Analysis - 3rd Apr 24
Stock Market Presidential Election Cycle Seasonal Trend - 2nd Apr 24
Dow Stock Market Annual Percent Change Analysis 2024 - 2nd Apr 24
Bitcoin S&P Pattern - 31st Mar 24
S&P Stock Market Correlating Seasonal Swings - 31st Mar 24
S&P SEASONAL ANALYSIS - 31st Mar 24
Here's a Dirty Little Secret: Federal Reserve Monetary Policy Is Still Loose - 31st Mar 24
Tandem Chairman Paul Pester on Fintech, AI, and the Future of Banking in the UK - 31st Mar 24
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Have We Entered A Treasury Bond Bear Market?

Interest-Rates / US Bonds Apr 14, 2010 - 08:19 AM GMT

By: Money_and_Markets

Interest-Rates

Best Financial Markets Analysis ArticleSharon A. Daniels writes: Bond investors were poised to hit the panic button last week … nervously watching as yields on 10-Year U.S. Treasury bonds briefly pierced the 4 percent level for the first time in well over a year.

Their concerns are understandable. After all, the threat of rising rates has been hanging over fixed-income markets ever since the Fed began printing money at hyper-speed during the financial crisis. And the fears haven’t subsided.


The big question on everybody’s mind: Is the end near for the bond market?

Not imminently. But we clearly see signs that long-term interest rates will be heading higher eventually given the massive federal deficits in the U.S. and our country’s reliance on foreign lenders.

Despite these worries, credit markets are currently stable. In fact, the 10-year Treasury bond auction at the end of last week was very well received and supported by strong buying interest from foreign investors — the strongest demand in at least 16 years.1

Interest Rates Have Been Near Record Lows For An Extended Period

So perhaps the bond market has been granted another reprieve … at least for now. Still, the ultimate day of reckoning for the bond market is coming … but it’s likely to be over time … not overnight. The key for fixed-income investors is not to panic over the short-term trading range moves in bond prices.

But it makes prudent sense to begin taking steps to help protect your portfolio against rising interest rates when they occur.

What this really boils down to is TIMING. It’s important to understand where and how to make the right moves with your fixed-income holdings. Some important questions to consider now include:

  • Which bonds and maturities perform best at different points in the business cycle?
  • What are the best fixed-income choices?
  • And which securities should do well as the recovery unfolds?

Seeking Increased Income Now … While Guarding Against Rising Rates Later

As president of Weiss Capital Management, an SEC Registered Investment Adviser for more than 25 years, my investment team and I regularly guide our clients through markets that are in transition, like they are now.

Massive amounts of government stimulus spending to combat the financial crisis will inevitably lead to higher inflation and higher interest rates down the road … no question. But it’s likely to happen in different countries and at different times. Again, timing is the key.

In the U.S., we don’t foresee a sudden surge in inflation or interest rates in the very near future, but it is on the horizon. Right now, economic fundamentals still appear too weak for inflation to take hold, and the Fed intends to keep interest rates low for an “extended period” as they’ve repeatedly broadcast. Right now, deflation is still public enemy number one in the U.S.

You can see the ongoing threat of deflation clearly in the graph. The broad measure of M2 U.S. money supply is contracting at a record rate … in spite of the Fed’s runaway printing press.

Persistent Signs of Deflation

The trouble is the Fed’s funny money isn’t getting circulated back into the real economy … why? Because it’s locked up in bank vaults as outstanding bank credit contracts at close to a 5 percent annual rate!2

So what should prudent investors be doing with their fixed-income portfolio now?

Here are four steps we believe you should consider to potentially increase your income in today’s low yield environment … while still helping to protect yourself against higher interest rates down the road …

#1Start with the right investment vehicle. We recommend that all but the very largest portfolios utilize mutual funds. They give you professional management and a diversified mix of fixed-income holdings, which can help reduce interest rate and credit risks — two risks you must watch out for.

#2Spread your fixed-income dollars across a broad mix of securities with different maturities. This tactic can help increase your income potential without significantly increasing your risk. We suggest owning a mix of corporate and government bond funds, preferably with shorter durations.

Of course, the shorter your maturities, the lower the yield, but shorter maturities are also less sensitive to price changes as interest rates fluctuate. By adding medium-term maturities and international or emerging market bonds, you may be able to kick up your cash flow even more. But note that higher yields can add more risk too and the same goes for international bonds, which are also sensitive to currency fluctuations.

#3Keep your overall portfolio maturity under about 5 years. Maturity, or duration, is measured in years and it is a standard data point provided by mutual funds on their websites. It’s a bit more difficult to calculate it across your entire portfolio of fund holdings.

At Weiss Capital, our professional oversight helps determine the right blend of income-producing securities and maturities to strike a balance between risk and return potential within the portfolio while helping you maintain cash flow.

#4Consider allocating a small portion of your portfolio to inverse funds and foreign currency funds. Such specialty funds, if used prudently, can provide a hedge against currency fluctuations and also hedge against rising interest rates.

A small allocation toward these funds is recommended. A word of caution though: They must be used sparingly, chosen carefully and, above all, monitored quite closely. These types of investments are typically not suitable for retail investors who plan to hold them longer than one trading session. Still, when used wisely, or with professional guidance, inverse funds may help reduce the volatility in your portfolio overall. Weiss Capital Management has extensive experience utilizing these securities in pursuit of overall investment objectives.

Choosing the appropriate mix of fixed-income investments that is right for you and maintaining proper diversification can be a challenging task in today’s volatile markets. For professional guidance from experienced investment managers, you may also want to consider a professionally-managed income strategy.

1 Bloomberg: Treasuries Head for Weekly Gain on Rate Outlook, Auction Demand, 4/9/10 http://www.bloomberg.com/apps/news?pid=20601009&sid=a25BXtcOXnd0

2 BCA Research: U.S. Investment Strategy, 3/22/10

Sharon A. Daniels
President
Weiss Capital Management, Inc.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in