It's Bullish For Bonds Again

04/04/2007 12:01 am EST

Focus: FUNDS

Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

Pamela and Mary Anne Aden, editors of The Aden Forecast, think a slowing economy and an inverted yield curve suggest good times for bonds in the months ahead.

Regardless of inflation pressures, the Federal Reserve simply can’t keep raising interest rates. Instead, the Treasury bill rate will probably continue resisting near its 27-year down trend and it’ll then likely turn down in the months ahead.

That’s why we’re now recommending bonds again. They should do well as interest rates decline and if the economy slows, rates could fall more than most people think. We like long-term US government bonds going out ten years or more. We’d keep only a small 10% position in bonds for the time being. But this percentage could increase.

The inverted yield curve, for example, continues to signal that a slowing economy or recession is coming. Interest rates are usually higher the further out you go, but the opposite has been taking place for nearly nine months now.

Plus, consumer confidence is at a four-month low, and the index of leading economic indicators is down, which are not good signs. If a recession is on the horizon, then bond prices will move up strongly.

The safety factor is also bullish for bonds. Bond prices rose strongly when world stock markets dropped. The bond market also gained as sub-prime mortgage losses shifted the focus to high-quality debt.

If these or other factors unnerve investors again, bonds will move higher, as they usually do during flights to safety. This safety attraction alone could easily drive the ten-year note’s yield down to 4.25%. That’s the up trend and channel support level since 2003.

Note that the 30-year bond’s price has again risen above its 65-week moving average, signaling that bonds are bullish and the major trend is up. If bonds now stay bullish, it’ll be a sign that the economic tug of war has tipped to the slowdown or recession side and bond prices will be at the onset of a new bull market.

The leading (long-term) indicator is reinforcing this. It’s been rising from a low area, which in the past has coincided with a sustained rise in bonds. This means that bond prices will likely be rising in the months to come. That is, long-term interest rates will be on the decline. In other words, the economy will at least be vulnerable for the next few months and that’ll be a greater concern than inflation.

So, bonds are hinting that we could be in for some interesting times. Was this month’s volatility in all of the markets perhaps a taste of things to come? We’ll soon see. In the meantime, keep an eye on 4.80% and 4.90% for the yields on the 10-year note and 30-year bond. If they stay below those levels, bond prices will remain bullish and the major trend for long-term interest rates will be down.

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