Best of the Week
Most Popular
1.UK House Prices BrExit Crash NOT Likely Despite London Property Market Weakness - Nadeem_Walayat
2.BrExit Morning - New Dawn for Britain, Independence Day! - Nadeem_Walayat
3.LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - Nadeem_Walayat
4.BrExit Implications for UK Stock Market, Sterling GBP, House Prices and UK Politics... - Nadeem_Walayat
5.Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - Nadeem_Walayat
6.FTSE and Sterling Brexit Trading, Deconstruction of the EU Referendum Result - Nadeem_Walayat
7.UK Interest Rate Cut to 0.25% Imminent and More QE Money Printing - Nadeem_Walayat
8.Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - Nadeem_Walayat
9.The Stock Market is Reading it Wrong! - Chris_Vermeulen
10.Breakouts Galore in Gold and Silver - Jordan_Roy_Byrne
Free Silver
Last 7 days
Elliott Wave Crash Course - 3 Ways the Elliott Wave Principle Enhances Your Trading - 28th July 16
Japan's "Helicopter Money" Play: Road to Hyperinflation or Cure Debt Deflation? - 27th July 16
Monetary Zika - The Insidious Nature of Credit Expansion - 27th July 16
Gold and Pork Bellies - 27th July 16
Silver Is Insurance Against The Worst Part Of This Depression - 27th July 16
Don’t Buy The SPX Hope Stock Market Rally! - 27th July 16
Bitcoin $650 Still in Play - 26th July 16
Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - 26th July 16
The Forex Markets Are Getting Exciting! - 26th July 16
Underpriced Silver Is the “Rip Van Winkle” Metal - 25th July 16
Declines in Multiple Market Indexes - 25th July 16
Retailers Are Doomed as Most Americans Are Too Poor to Shop - 25th July 16
Here’s One Currency That Could Go to Zero - 25th July 16
Stock Market Top is Expanding - 25th July 16
Silver Manipulation – Because They Needed the Eggs - 25th July 16
Silver Market COT Stuns: What's Going On Here? - 24th July 16
Gold Demand Remains Stable During Sector Weakness - 24th July 16
Sernova, Diabetes and Haemophilia - 24th July 16
Russia: Tensions, Turmoil, and Western Hubris - 24th July 16
Soybean Commodity Price to Soar Again - 23rd July 16
SPX Stock Market Uptrend Continues - 23rd July 16
Gold And Silver – Debt Addiction Will Carry Precious Metals Higher, Guaranteed - 23rd July 16
Pokemon Go - How to Play, First Use, Balls, Stops, Catching Pokemon's... Great Excercise! - 23rd July 16
7 Signs That the Gold Market Remains Resilient - 23rd July 16
Basic Income in The Time of Crisis - 23rd July 16
Silver Bull Faces Correction - 22nd July 16
The Serious Warning No One’s Talking About - 22nd July 16
Stock Market Insight from Greed, Volatility, and Put/Call Ratio - 22nd July 16
What Will Happen To the Stock Market When Interest Rates Rise? - 22nd July 16
How to Escape the World’s Biggest Ponzi Scheme - 22nd July 16
Addicted to Debt - We Can’t Borrow from the Future Anymore - 21st July 16
Not Everything Is Bullish for Gold - 21st July 16
Don’t Get Sucked Back Into the Stock Market - The Big Picture Hasn’t Changed - 21st July 16
Silver – Caught Inside - 21st July 16
Forex: "The Markets Are Getting Exciting!" - 20th July 16
China Economic Troubles - Is Kyle Bass Finally Getting His Revenge? - 20th July 16
Why Lithium Will See Another Price Spike This Fall - 20th July 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

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

© 2005-2016 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

Catching a Falling Financial Knife