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
Silver Outlook Is 'Excellent' - 23rd July 19
Why The Coming Silver Rally Might Be The Greatest - 23rd July 19
We Are in for Decades of Ultra-Loose Monetary Policy - 23rd July 19
Gold & Gold GDX Stocks Ripping. What’s Next? - 23rd July 19
Stock Market Breadth Warning Signs for the Stock Market’s Rally? - 23rd July 19
U.S. Recession Watch: The Six-Cycle Forecast - 23rd July 19
US Dollar Index tightly wound between: US Bond Yields down on safety flows - 23rd July 19
Stocks Bull or Bear? The Market’s Message - 23rd July 19
This Dividend Aristocrat Is Leading the 5G Revolution - 22nd July 19
What the World Doesn’t Need Now is Lower Interest Rates - 22nd July 19
My Biggest 'Fear' For Silver - 22nd July 19
Reasons to Buy Pre-Owned Luxury Car from a Certified Dealer - 22nd July 19
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19

Market Oracle FREE Newsletter

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

U.S. Bond Market - If There’s a Time to Panic… It’s Now

Interest-Rates / US Bonds Jun 11, 2013 - 06:11 AM GMT

By: Investment_U

Interest-Rates

Alexander Green writes: I received several letters from readers concerning my recent column opining that the 30-year bull market in bonds is over.

Some asked if it was really that big a deal that bonds fell by 2% in May. The answer is yes. It is a big deal, especially when 10-year Treasurys yielded just 1.7% a month ago. That slight sell-off erased more than a year’s worth of interest.


The paltry income from these bonds is why longtime credit analyst Jim Grant says Treasurys offer “return-free risk.”

Of course, some say the bonds could rally 2% from here and investors would be made whole again. It’s possible, but how likely is it? Successful investing is about analyzing probabilities not possibilities.

With the economy improving, commodity prices (including gold) down, the dollar up and the stock market strong, more investors believe measly yields that offer safety from the storm is not what they’re looking for.

Many of them are moving money out of their vulnerable bond funds and moving them into investments with more total return potential.

Get Out Now
Several readers also asked me to clarify what a leveraged bond fund is and why they should get the heck out of it if they have one.

A leveraged bond fund is the fixed-income equivalent of buying stocks on margin. We all know that a margined stock portfolio performs better on the upside… and hurts more on the downside.

The same is true of leveraged bond funds.

The fund manager borrows short-term to buy longer-term bonds with higher interest rates and is therefore able to earn “the spread” or difference between the two rates.

This is all well and good as long as the bond market is flat or climbing. But when it tanks – as it did in May – look out below.

If you don’t know whether your bond funds are leveraged or not, don’t just shrug your shoulders. Call the fund and ask. If it is… get out now. Don’t hesitate.

And if you own a closed-end fund that uses leverage, that goes double.

Twice as Deadly
Unlike open-end funds that are bought or redeemed at net asset value (NAV) at the close of each business day, a closed-end fund is publicly traded. That means it has both a market price and a net asset value. The fund may trade above its net asset value – in which case it is said to be trading “at a premium” – or it may trade below its NAV, in which case it is trading “at a discount.”

When times are good in the bond market, these funds tend to trade fairly close to their NAVs. But when bonds sell off, the funds often fall to a substantial discount.

As a shareholder, that means you will see your position decline more than the bond market (since the portfolio is leveraged), and you may also see the fund drop to a substantial discount to its NAV.

It’s a double whammy.

Believe me, there are folks who own closed-end bond funds who will be stunned when these funds drop 30%, 40%, 50% or more. Those sorts of drops are not uncommon.

But unless an investor – or his broker – has seen a real secular bear market in bonds, he may have no idea what he’s in for.

That’s why fixed-income investors should heed legendary fund manager Peter Lynch’s sage advice: “If you’re gonna panic… do it early.”

Good investing,

Alex

P.S. My colleague Marc Lichtenfeld has been tracking the bond market’s inevitable collapse for months now. In a new special report, he outlines what’s about to happen and how investors can fully protect themselves. He’s even narrowed in on a unique type of income investment that’s poised to soar as much as 160% when this “three-minute event” occurs.

To see his full presentation, click here.

Source: http://www.investmentu.com/2013/June/time-to-panic-is-now.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