State of the market: The bond market gets closer to an all-in bet on recession as stocks give back h...
Bullish Bets on Bonds
03/24/2014 9:00 am EST
Bonds are considered a safe investment and whenever global conflicts, trouble, or uncertainty flares up, US Treasury bonds almost always benefit as a safe haven, observes Pamela and Mary Anne Aden in The Aden Forecast.
Currently, this is happening again, based on events in Ukraine, which is setting the stage for a financial flight to safety. When this happens, demand for US bonds increases, driving the long-term interest rate lower and bond prices higher.
Even though interest rates are already at historically low levels (in the past 84 years, they've only been lower in the late 1930s to early 1950s), it doesn't seem to matter. Interest rates could fall even further and we believe they will.
Why? Most important, the Fed is determined to keep interest rates low for as long as it's needed to help boost the sluggish economy. Deflationary forces are still weighing on the economy and the Fed's goal of reaching a 2% inflation rate is proving to be elusive, despite improvements in unemployment.
But the rules have changed. The Fed has already said they'll keep interest rates low, even if the unemployment rate falls below its previous 6.5% target level.
In other words, other factors will also be considered and there's little doubt that Yellen will continue to follow in Bernanke's footsteps. The emerging markets are generally having a tough time. Plus, interest rates are heading down in other countries as well.
So, all factors considered, most signals are telling us that interest rates are headed lower and/or they'll stay low for, probably, the rest of this year.
As you know, when interest rates decline, bond prices rise. And that's why we believe bonds could surprise investors and end up being one of this year's best investments.
Our technical indicators are reinforcing this, as the 30-year bond price's leading indicator is bottoming at a major low area. This has always preceded a steep rise in bond prices.
This suggests bonds could eventually rise back up to near the 2008 and 2012 highs. If this happens, as the leading indicator suggests, it would result in about a 40% gain in bond prices from current levels.
For now, we continue to recommend buying and keeping 15% of your total portfolio in long-term US government bonds. You can buy the individual over 10-year bonds outright, but bond ETFs are easier for most investors.
The ones we like best and recommend buying are the iShares 20+ year Treasury Bond (TLT), the iShares 10-20 year Treasury Bond (TLH), Proshares Ultra 20+ year Treasury (UBT) and Pimco Intermediate Muni Bond strategy ETF (MUNI).
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