Best of the Week
Most Popular
1.Are UK Savings Interest Rates Finally Starting to Rise? Best Cash ISA 2017 - Nadeem_Walayat
2.Inflation Tsunami - Supermarkets, Retail Sector Crisis 2017, EU Suicide and Burning Stocks - Nadeem_Walayat
3.Big Moves in the World Stock Markets - Big Bases - Rambus_Chartology
4.The Next Financial Implosion Is Not Going To Be About The Banks! - Gordon_T_Long
5.Why EU BrExit Single Market Access Hard line is European Union Committing Suicide - Nadeem_Walayat
6.Trump Ramps Up US Military Debt Spending In Preparations for China War - Nadeem_Walayat
7.Watch What Happens When Silver Price Hits $26...  - MoneyMetals
8.Stock Market Fake Risk, Fake Return? Market Crash? - 2nd Mar 17 - Axel_Merk
9.Global Inflation Surges, Central Banks Losing Control and Triggered the Wage Price Spiral? - Nadeem_Walayat
10.Why Gold Will Boom In 2017 - James Burgess
Last 7 days
USD Gold Myriad of Signs - 28th Mar 17
Ominous Social Trends That Will Shape Our Future - 28th Mar 17
Foundation And Empire: Is Donald Trump The Mule? - 28th Mar 17
Top Ten US Dollar Risks - 27th Mar 17
The Popularity of Gambling and Investing Amongst Students - 27th Mar 17
Is Political Betting on the Rise? - 27th Mar 17
US Stock Market Consolidation Time - 27th Mar 17
Russia Crisis - Maps That Signal Growing Instability and Unrest - 27th Mar 17
Goldman Sachs Backing A Copper Boom In 2017 - 27th Mar 17
Foundation – Fall Of The American Galactic Empire - 27th Mar 17
Stock Market More Correction Ahead - 27th Mar 17
US Dollar Inflection Point - 27th Mar 17
Political Week Presurres US Stock Market - 25th Mar 17
London Terror Attack Red Herring, Real Issue is Age of Reason vs Religion - 25th Mar 17
Will Washington Risk WW3 to Block an Emerging EU-Russia Superstate - 25th Mar 17
Unaccountable Military Industrial Complex Is Destroying America and the Rest Of The World Too - 25th Mar 17
Silver Mining Stock Fundamentals - 24th Mar 17
A Walk Down the Dark Road of Bad Government - 24th Mar 17
Is Stock Market Flash Crash Postponed Until Monday? - 24th Mar 17
Stock Market Bubble and Gold - 24th Mar 17
Maps Of Past Empires That Can Tell Us About The Future - 24th Mar 17
SNP Independent Scotland's Destiny With Economic Catastrophe, the English Subsidy - IndyRef2 - 24th Mar 17
Stock Market VIX Cycles Set To Explode March/April 2017 – Part II - 23rd Mar 17
Is Now a Good Time to Invest in the US Housing Market? - 23rd Mar 17
The Stock Market Is a Present-Day Version of Pavlov’s Dog - 23rd Mar 17
US Budget - There’s Almost Nothing Left To Cut - 23rd Mar 17
Stock Market Upward Reversal Or Just Quick Rebound Before Another Leg Down? - 23rd Mar 17
Trends to Look Out For as a Modern-day Landlord - 23rd Mar 17
Here’s Why Interstate Health Insurance Won’t Fix Obamacare / Trumpcare - 23rd Mar 17
China’s Biggest Limitations Determine the Future of East Asia - 23rd Mar 17
This is About So Much More Than Trump and Brexit - 23rd Mar 17
Trump Stock Market Rally Over? 20% Bear Drop By Mid Summer? - 22nd Mar 17
Trump Added $3 Trillion in Wealth to Stock Market Participants - 22nd Mar 17
What's Next for the US Dollar, Gold and Stocks? - 22nd Mar 17
MSM Bond Market Full Nonsense Mode as ‘Trump Trades’ Unwind on Schedule - 22nd Mar 17
Peak Gold – Biggest Gold Story Not Being Reported - 22nd Mar 17
Return of Sovereign France, Europe’s Changing Landscape - 22nd Mar 17
Trump Stocks Bull Market Rolling Over? You Were Warned! - 22nd Mar 17
Stock Market Charts That Scream “This Is It” - Here’s What to Do - 22nd Mar 17
Raising the Minimum Wage Is a Jobs Killing Move - 22nd Mar 17
Potential Bottoming Patterns in Gold and Silver Precious Metals Stocks Complex... - 22nd Mar 17
UK Stagflation, Soaring Inflation CPI 2.3%, RPI 3.2%, Real 4.4% - 21st Mar 17
The Demise of the Gold and Silver Bull Run is Greatly Exaggerated - 21st Mar 17
USD Decline Continues, Pull SPX Down as well? - 21st Mar 17
Trump Watershed Budget - 21st Mar 17
How do Client Acquisition Offers Affect Businesses? - 21st Mar 17
Physical Metals Demand Plus Manipulation Suits Will Break Paper Market - 20th Mar 17
Stock Market Uncertainty Following Interest Rate Increase - Will Uptrend Continue? - 20th Mar 17
Precious Metals : Who’s in Charge ? - 20th Mar 17
Stock Market Correction Continues - 20th Mar 17
Why The Status Quo Is Under Increasing Attack By 'Populist People Power' - 20th Mar 17

Market Oracle FREE Newsletter

Elliott Wave Trading

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