Bet on Bonds

02/02/2015 9:00 am EST

Focus: ETFs

Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

The bond market is super strong. It’s again hitting new bull market highs. Long-term US government bonds were the big investment winners in 2014, gaining 46%. And it looks like that’s going to continue, very possibly throughout 2015, suggests Mary Anne and Pamela Aden, editors of The Aden Forecast.

We know that may seem strange, especially considering the big rise bonds have already had, but it’s really not. Here’s why...

1. There’s a huge demand for US bonds from all over the world. Even though US interest rates are very low, US bonds are still paying a higher interest rate than rates in most other countries. That makes them more attractive and the world’s favorite safe haven.

2. The US dollar is also super strong. That too enhances the appeal for US government bonds, especially for foreign investors.

3. The same is true of the US economy. It grew 5% in the third quarter, its biggest gain in a decade. That’s in sharp contrast to the sluggish growth or recessions in other countries. And again, this makes bonds very attractive.

4. Deflation has the upper hand on the world stage and inflation is low. It’s probably going to stay low for quite a while, considering the plunge in the oil price. This environment is also ideal for rising bond prices.

5. With the rest of the world on thin ice, it would be too risky for the Fed to raise rates prematurely. This means bonds will probably keep rising for most of this year.

Plus, US government bonds are super safe. And if deflationary pressure persists, as we suspect, there’s a good chance the 30-year yield could decline lower than the previous bottoms. In other words, bond prices would rise a lot further.

The 30-year bond has been dropping since 1981. Since then, it’s gone from 15% to 2.45%. The lows in 2008 and 2012 were at the 2.50% level, so this provides a strong support area.

But if this level is clearly broken, the 30-year yield will likely drop down to retest the lows of 1940 and 1950, near 2%. At this point, we don’t know if that’s going to happen, but we wouldn’t be surprised if it does.

Why? Mainly because of the deflationary pressures. Also, our technical indicators are showing there’s still some room on the downside for interest rates to fall further, both in the medium-term and the long-term, before they’re oversold or too low.

So the bottom line is…until we see otherwise, we’re going to continue to buy and hold long-term US government bonds. The major trend is solid and it remains up, telling us to stay with bonds. As such, we continue to recommend these bond ETFs:

Proshares Ultra 20+ Treasury (UBT)
iShares Barclays 20+ Year Treasury Bond (TLT)
SPDR Long-Term Treasury (TLO)
iShares Lehman 10-20 Year Treasury Bond (TLH)

This market is strong and bullish and government bonds continue to be the best overall investment in today’s environment.

Even though these markets could decline a bit in the weeks ahead, stay with them. And if they do stall, that’ll provide an even better buying opportunity. Either way, though, buy some bonds if you haven’t bought yet.

Subscribe to The Aden Forecast here…

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