Last month we purchased Fidelity Limited Term Bond (FJRLX) in our model portfolio. Part of our strat...
Bonds: "Uncharted Waters"
02/23/2015 8:00 am EST
Even though many people think interest rates are boring, they're actually the most interesting market in the world today, suggests Mary Anne and Pamela Aden, editors of The Aden Forecast.
During these deflationary times, growth is slow and inflation is declining. So, low interest rates have been a tool for many countries to help boost their economies.
Low rates have also been used to keep their currencies weak because in this era of currency wars, no country wants a strong currency and low interest rates make a currency less desirable.
The problem is, things are going overboard. Currently, for instance, interest rates are below 0% in Japan, Germany, Switzerland, France, Belgium, Austria, and Denmark. That's right. In these countries, interest rates are negative, meaning depositors have to pay the bank to keep their money.
Now here's the shocker. This is unprecedented in world history. In fact, the book, A History of Interest Rates, shows that with the brief exception of Swiss interest rates in the 1970s, there has never been a time when interest rates were below zero in the major countries. We're talking about 800 years.
We are literally in uncharted waters and the eventual outcome, repercussions, and effects are totally unknown because this has never happened before.
Deflationary pressures are intensifying. Japan is locked in deflation and Europe is struggling. Russia is in dire straits and China is slowing. This will continue to be a very positive environment for rising bond prices.
US government bonds remains the world's favorite safe haven. At the first signs of financial uncertainty, or if there's something wrong in the world, the flood into US bonds has become even more extreme.
For now, the bond market has risen too far, too fast and a normal downward correction is currently underway. This will provide a good opportunity to buy new bonds or bond ETFs if you haven't bought yet or if you want to add to your bond positions.
We continue to recommend keeping long-term US government bonds. We also like the bond ETFs. ProShares Ultra 20+ Year Treasury ETF (UBT) is our favorite and it's the best for buying new positions and/or adding to the ones you have, ideally during this downward correction.
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