We've made several changes in our model portfolio to increase our margin of safety amid the market v...
Get On Board the Bond Bull
05/28/2014 9:00 am EST
Bonds have, by far, been the top performers this year, gaining 19% and outpacing stocks, metals, and the currency markets; we believe they are headed a lot higher, forecasts Mary Anne and Pamela Aden, editors of The Aden Forecast.
This has been a big surprise for most investors and many feel it’s a temporary fluke. But we don’t think so. On the contrary, we’re very bullish on bonds and believe they’ll continue to be a top performer this year.
At this point, you may be thinking…but wait, with the Fed tapering its bond purchases, and foreign investors cutting back on their bond buying, won’t interest rates have to head higher? And if they do rise, won’t bond prices drop?
Yes, that’s the general consensus, but it’s not working out the way most investors and market pundits expected. Instead, bonds and interest rates are going in the opposite direction.
Why? Bonds are again becoming the safe haven of choice. As you know, bond investors are known to be more savvy and sophisticated than mainstream investors. They generally have a better feel for what’s coming and they then invest accordingly.
So even though many investors think bonds are boring, they are not, and bond investors know this only too well. This year, for instance, long-term government bonds have, so far, gained 19%. That’s the best start to a new year in decades.
In 2007-08, for example, bonds soared about 38%, and it looks like this current move could be similar. Why? The main reason is because deflation pressures are growing and the economy is almost on life support.
Despite the Fed’s efforts to boost the economy and inflation over the past few years, inflation remains very low. Deflation is gaining ground, which is very bullish for bonds.
It could drive this market sharply higher and our leading indicators are reinforcing this outlook. Bonds are now rising above their long-term moving average, signaling the major trend is turning up.
This means the bond price is headed higher this year and it’ll probably continue up to, at least, its 2012 high. If so, it would be a 33% gain from its current levels. The leading indicator is also rising from a low area, confirming that higher prices lie ahead.
Bonds are looking good, which is why we want to see you get on board, especially now that the train is clearly pulling out of the station.
We now recommend buying more bonds. This will add to your 15% bond position, which we initially bought in February. In other words, we currently advise raising your bond position to 35% of your total portfolio.
You can buy the individual over 10-year US bonds outright, but bond ETFs are probably easier for most investors.
The ones we like best are ProShares Ultra 20+ Year Treasury ETF (UBT), SPDR Lehman Long Term Treasury (TLO), iShares Barclays 20+ Year Treasury Bond ETF (TLT), and iShares Lehman 10-20 Year Treasury Bond ETF (TLH).
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