Bonds Part III: Bond Bears

07/25/2003 12:00 am EST


William Donoghue

Chairman and Founder, W.E. Donoghue & Co., Inc.

In the articles above, we cite select buying opportunities in global and high yield bonds. Several advisors, however, are less sanguine about the prospects for bonds and interest rates. Here, technical analyst John Bollinger makes a case for a top in bonds, while mutual fund guru Bill Donoghue suggests bond funds that will benefit from rising rates.

"The top is in for the bond market," says technical expert John Bollinger in his Capital Growth Letter. "There is every reason to believe that if the 21-year secular bull market in bonds hasn't come to an end, then at minimum we have transitioned from cyclical bull market for bonds to a cyclical bear market. In either case you should be taking action to protect yourself. In the current environment you want to be a borrower, not a lender. For example, sell bonds and refinance the house. If you have assets that are interest rate sensitive consider hedging if possible. If 1994, when the last real storm hit the bond market is any example, this bear market could be a doozey. This bear market in bonds is bound to bring on a disaster of major proportions. When interest rates start to rise in earnest bond prices will start to fall, and that means more bond sales and yet lower prices. But the real disaster will be in the mortgage market. Unless I misunderstand the current situation dramatically, this will be the next big financial story and it will not be a good one. Expect to see at least one major financial institution on the rocks, perhaps even Fannie Mae or Freddie Mac, but more likely a bank or insurance company."

"The Fed has lowered interest rates just about as far as possible, and the risk that rates will rise is substantial," says Bill Donoghue in his Power Portfolios.  "How do you make money when interest rates rise? By doing the opposite of how you made profits as interest rates fell. There are only two ways to make money when interest rates rise if you choose to invest in mutual funds. The first is to invest in funds designed to profit from rising interest rates. Rising Rates Opportunity ProFund (RRPIX) is designed to earn, before expenses and fees, 125% of what the long Treasury bond loses. Rydex Juno (RYJUX) is designed to earn 100% what the long Treasury bond loses. One alternative to these funds is to short sell Exchange Traded Funds (ETFs), like Barclay's iShares, which offers four fixed-income Exchange Traded Funds: iShares Lehman 1-3 Year Treasury Bond (SHY ASE); iShares Lehman 7-10 Year Treasury Bond (IEF ASE); iShares GS InvesTop Corporate Bond (LQD ASE); and  iShares Lehman 20+ Year Treasury Bond (TLT ASE)."

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