Sell Treasuries, Hold Corporates, Love Dividends

09/22/2010 1:00 pm EST

Focus: ETFS

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Doug Fabian, editor of High Monthly Income and Successful Investing, tells why he’s exiting Treasuries while he continues to like corporate bonds and dividend-paying stocks.

We all know there has been some very big volatility in stocks this year, but the volatility in the equity markets actually pales in comparison to the recent price swings in the bond market. Since hitting their August lows, 30-year Treasury bond yields spiked nearly 12%. Yields now are close to breaching their short-term, 50-day moving average.

The recent spike in bond yields, and the concomitant decline in bond prices, actually prompted a change in our portfolio allocation. On Friday, September 10th, our position in the iShares Barclays 7-10 Year Treasury ETF (NYSEArca: IEF) fell below our stop-loss price of $97.

Now, if you still are holding IEF in your portfolio, then you are actually in luck. The fund now trades above the $97 price, closing [Tuesday around $98.50]. This means you have an even greater opportunity to profit via your sale of IEF.

Long-term Treasury bonds have just become too overbought of late, and that means a slight correction in bond prices (i.e., a rise in bond yields) is well overdue. I don’t think the recent spike in yields quite signals the bursting of the bond bubble that so many pundits have been speculating about, but I do think that Treasury bond owners of all stripes should be keenly aware of any exposure to this most-volatile segment of the bond universe.

[Meanwhile,] the chart of the iShares Barclays Aggregate Bond ETF (NYSEArca: AGG) tells a beautifully bullish tale. This investment-grade bond fund is trading well above both short- and long-term trend lines, and the fund continues trading at or near its 52-week highs. (It closed above $108 Tuesday—Editor.)

The question now, of course, is can bonds continue delivering for investors? I suspect that the bond party won’t last forever. But, that said, investors really have shown no willingness to exit the sector. Until we see a change in investors’ appetites away from bonds and into stocks, we’ll stick with our AGG position.

Our position in the iShares Dow Jones Select Dividend Index ETF (NYSEArca: DVY) has benefitted mightily from the recent surge in equity prices. We now are firmly above our stop-loss price of $44.50 on this fund, with DVY closing [Tuesday just below $47]. I want you to continue holding this dividend-paying equity fund, as we want to remain safely exposed to equities while the market trends higher.

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