Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
If You Don’t Understand Bonds, You Don’t Understand Investing - 25th Aug 19
Gold's Next Move - 25th Aug 19
Fresh Water Crisis Unfolding - 25th Aug 19
Newbie Guide to Currency Pairs in Forex Trading – Review - 25th Aug 19
When A 16-Year-Old Earns $3 Million, You Know It's Not A 'Silly Fad' - 24th Aug 19
The Central Bank Time Machine - 23rd Aug 19
Stock Market August Breakdown Prediction and Analysis - 23rd Aug 19
U.S. To “Drown The World” In Oil - 23rd Aug 19
Modern Monetary Theory Could Destroy America - 23rd Aug 19
Seven Key Words That Explain "Stupidly High" Bond Market Prices - 23rd Aug 19
Is the Fed Too Late Prevent A US Housing Bear Market? - 23rd Aug 19
Manchester Airport FREE Drop Off Area Service at JetParks 1 - Video - 23rd Aug 19
Gold Price Trend Validation - 22nd Aug 19
Economist Lays Out the Next Step to Wonderland for the Fed - 22nd Aug 19
GCSE Exam Results Day Shock! How to Get 9 A*'s Grade 9's in England and Maths - 22nd Aug 19
KEY WEEK FOR US MARKETS, GOLD, AND OIL - Audio Analysis - 22nd Aug 19
USD/JPY, USD/CHF, GBP/USD Currency Pairs to Watch Prior to FOMC Minutes and Jackson Hole - 22nd Aug 19
Fed Too Late To Prevent US Real Estate Market Crash? - 22nd Aug 19
Retail Sector Isn’t Dead. It’s Growing and Pays 6%+ Dividends - 22nd Aug 19
FREE Access EWI's Financial Market Forecasting Service - 22nd Aug 19
Benefits of Acrobits Softphone - 22nd Aug 19
How to Protect Your Site from Bots & Spam? - 21st Aug 19
Fed Too Late To Prevent A US Housing Market Crash? - 21st Aug 19
Gold and the Cracks in the U.S., Japan and Germany’s Economic Data - 21st Aug 19
The Gold Rush of 2019 - 21st Aug 19
How to Play Interest Rates in US Real Estate - 21st Aug 19
Stocks Likely to Breakout Instead of Gold - 21st Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 21st Aug 19
WAYS TO SECURE YOUR FINANCIAL FUTURE - 21st Aug 19
Holiday Nightmares - Your Caravan is Missing! - 21st Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

U.S. Treasury Bond Market's Last Bull Run

Interest-Rates / US Bonds Mar 02, 2013 - 12:43 PM GMT

By: Investment_U

Interest-Rates

Steve McDonald writes: When the Italians couldn’t agree on one candidate, and the U.S. faced it’s so called sequester, it may have been the last shot of life support for the bond market, for a long time.

This is very likely the last hurrah for the 30-year bond bull market. It may also be the last chance for the multitudes that have been plowing money into bond funds to take profits and save their retirements.


This is no joke!

At this point, no one needs to be told that interest rates have to run up and bond prices have to fall. When this will happen, or what economic force will cause this unavoidable shift, is anyone’s guess. But, it will happen and for the unprepared it will be one of the biggest blood baths in market history.

The victims of this devastation will be the same ones who are suffering through the current ultra-low, artificially-supported low interest rates; the retired and other conservative investors.

These folks have been pouring money into any bond fund, and long maturity bonds, that offer anything resembling a livable return. The risk, and it is a very real risk to their ability to pay their bills, is they don’t understand how much they can lose when seemingly safe bond funds drop like rocks as rates increase.

The longer the maturity of a bond, or the average maturity of a bond fund, the higher the yield. But, longer maturities mean a much greater percentage drop in price when bonds begin to sell off.

Maturity though is only part of the problem.

The same bond funds, unfortunately the ones most were buying, that advertised the highest yields also have the highest amount of leverage. Leverage is the kiss of death in a bond selloff, and believe me, you don’t want this kiss.

Bond funds borrow money against the bonds in the fund’s portfolio to buy more bonds to generate more income. That’s how some bond funds seem to be able to pay a lot more yield than others. They leverage them to the max.

This is all fine and good until rates run up and the cost of that leverage takes off, too. It is a one-two punch that can cost you 25% and 30% of your principal in a heartbeat.

As the borrowing cost goes up, the value of the underlying bonds is going down. So, your share value is falling but it is being driven by two negatives, not just one.

Aggravating this whole mess is the fact that the highest paying bond funds, the ones that attracted all the money in the past five years, only hold very long maturities. Now you have three negatives driving the shares to the toilet; a long overdue selloff, very long maturities and leverage.

I’m not kidding when I say you don’t want to be on the receiving end of this monster. But that is exactly where most small investors are, on the receiving end of a vicious right hook they will never see coming.

Averting Disaster with a Three-Step Strategy
There is a safe alternative to this calamity, and considering how much bonds have run up in price, it’s very likely a win-win alternative. It’s a three-step strategy that will not only earn above market returns, 5% to 12% annually, but turn the eventual run up in interest rates into the biggest payday of your investment life.

Step one; sell any bond or bond fund with a maturity, or average maturity, greater than seven years. Also sell any fund with leverage. If you have held them for any period of time you should have a very nice capital gain.

A nice profit, that’s the first positive.

Next, buy ultra-short maturity corporate bonds, less than seven year maturities, in small positions, as few a one bond per position, over many industries. The idea is to limit your exposure to any one company and have bonds maturing every year.

Have at least one bond maturing each year for the next seven years. If you have the cash, try to have several bonds maturing every year.

This is step three of the strategy, I call it a Staggered Ladder. Having at least one bond maturing every year will give you fresh cash every year to buy into a rising rate market, at rock bottom prices, and we will have both..

That’s the second positive.

When rates run up it will not be an overnight shift. We could see short duration spikes, but the run up will average out over several years and it will give you the opportunity to buy great bonds every year at dirt cheap prices.

Dropping bond prices will crush those still in the long end of the market, but if you have money available each year to capitalize on it, it will be a bond buyer’s dream come true; higher rates, higher overall returns and cheap bonds.

The third positive.

In 2008, during the last panic in the bond market, I was buying AA and AAA corporate bonds as low as 50 cents on the dollar, with yields in the high teens and low twenties. 20% annual returns were common, several earned over 40%.

The key to this strategy is to not try to stay in the current market to the end. I promise you, you will be wrong. If you shop around, even in this market, you can find good high-yield bonds paying a minimum annual return of 5% to 12%.

The real kicker, high-yield bonds right now only have about a 3% default rate. That means 97% are paying exactly as promised. You can’t argue with those odds.

This advice may seem totally foreign and the opposite of what your gut is telling you. One reason for this is that bonds are the great unknown. Most small investors know more about options than bonds, and most of what they do know about bonds is 180 degrees out.

My 30 years in the markets, and having watched 30% of many of my client’s money disappear in 1994, the last time we saw really big rate increases, tells me it is the only way for conservative investors to avoid the beating that is coming and to capitalize on it.

Act now! The bond bull is out of steam. Don’t be under it when it falls.

Good Investing,

Steve

Source: http://www.investmentu.com/2013/March/the-bond-bulls-last-run.html

http://www.investmentu.com

Copyright © 1999 - 2013 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email: CustomerService@InvestmentU.com

Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Investment U Archive

© 2005-2019 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

6 Critical Money Making Rules