Best of the Week
Most Popular
1. Trumponomics Stock Market 2018 - The Manchurian President (1/2) - Nadeem_Walayat
2.Yield Curve Inversion a Remarkably Accurate Warning Indicator For Economic & Market Peril - Dan_Amerman
3.China is Now Officially at War With the US and Japan - Graham_Summers
4.Markets Pay Attention Moment - China’s Bubble Economy Ripe for Bursting - 16th Jul 18 - Plunger
5.Stock Market Longer-Term Charts Show Incredible Potential - Chris_Vermeulen
6.U.S. Stock Market Cycles Update - Jim_Curry
7.Another Stock Market Drop Next Week? - Brad_Gudgeon
8.The Death of the US Real Estate Dream - Harry_Dent
9.Gold Market Signal vs. Noise - Jordan_Roy_Byrne
10.The Fonzie–Ponzi Theory of Government Debt: An Update - F_F_Wiley
Last 7 days
Large Caps Underperformance vs. Small Caps is Bullish for Stocks - 16th Aug 18
“The Big Grab” - Failing Pension and Retirement System - 16th Aug 18
How US Indo-Pacific Vision Forgot Asian Development - 16th Aug 18
Impulse Moves in the Currencies - 15th Aug 19
Best Merlin UK Theme Park Summer Holiday 2018 - Thorpe, Alton Towers, LegoLand or Chessington? - 15th Aug 18
The Essence of Writing an Essay that Must be Understood - 15th Aug 19
Is Solar Energy Rising From The Ashes Again? - 15th Aug 18
A Bullish Bond Argument That Hides in Plain Sight - 15th Aug 18
Jim Rogers on Gold, Silver, Bitcoin and Blockchain’s “Spectacular Future” - 15th Aug 19
A Depressed Economy And A Silver Boom - 15th Aug 19
Moving Averages Help You Define Market Trend – Here’s How - 14th Aug 18
It's Time for A New Economic Strategy in Turkey - 14th Aug 18
Gold Price to Plunge Below $1000 - Key Factors for Gold & Silver Investors - 14th Aug 18
Dow Stock Market Trend Forecast 2018 - Video - 13th Aug 18
Stock Market Downtrend to Continue? - 13th Aug 18
More Signs That the Stock Market Will Rally Until 2019 - 13th Aug 18
New Stock Market Correction Underway - 13th Aug 18
Talk Cold Turkey Economic Crisis - 13th Aug 18
Which UK Best Theme Park - Alton Towers vs Thorpe Park vs Lego Land vs Chessington World - 12th Aug 18
USD is Rising. What this Means for Currencies and Stocks - 12th Aug 18
Hardest US Housing Market Places to Live - Look Out Middle Class - 12th Aug 18
America’s Suburbs Are Making a Comeback - 12th Aug 18
Stock Market US Presidential Cycle, Seasonal Analysis and Economy - Video - 12th Aug 18
Yield Curve Inversion and the Stock Market - Video - 11th Aug 18
Land Rover Discovery Sport 1st Dealer Oil Change Service - What to Expect - 11th Aug 18
How to Setup Webinars and Use Them to Overcome the Barriers in E-Learning - 11th Aug 18
Big US Stocks’ Q2’18 Fundamentals - 11th Aug 18
Dow Stock Market Trend Forecast 2018 - 10th Aug 18
SPX Testing Its First Support Level - 10th Aug 18
Dreaming of a "Comfortable Retirement" on a Public Pension? - 10th Aug 18
The Forrest Gump of All Future Democrat Election Losses - 10th Aug 18
More Uncertainty as Stocks Got Closer to January Record High - 10th Aug 18
Gold and Silver Kill Zone - 9th Aug 18
Even More Cracks in the Gold Dam - 9th Aug 18
Ignore the Stock Market “midterm election year”, Which is “supposed” to be Weak - 9th Aug 18
Stock Market Trend and Volatility Analysis - Video - 9th Aug 18
Tips on Maximizing Small Serviced Offices Space - 9th Aug 18
VIX’s Collapse is Bullish for VIX and the Stock Market - 9th Aug 18
Vestles Platform Offers Several Key Trading Tools - 8th Aug 18
US Stock Markets Higher Until November 2018 - Part 2 - 8th Aug 18
US Stock Markets Higher Until November 2018 - Part 1 - 8th Aug 18
Stock Market US Presidential Cycle and Seasonal Analysis - 8th Aug 18

Market Oracle FREE Newsletter

Trading Any Market

Wading Through the Bond Market Bloodbath

Interest-Rates / US Bonds Jul 15, 2013 - 12:32 PM GMT

By: Money_Morning

Interest-Rates

Robert Hsu writes: If you're an investor who has been following a traditional income-style portfolio allocation that includes a lot of U.S. Treasury bonds, then you are likely having a very uncomfortable summer.

Indeed, since the Federal Reserve's "taper" narrative was first introduced to Wall Street by Chairman Ben Bernanke on May 22, there's been a virtual bloodbath in the bond market.


To give you a sense of how much red ink has been spilled in Bondville, let's take a look at the broad measure of the long end of the Treasury bond spectrum, the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT).

Here we see that from May 21 through July 10, the value of TLT plunged 9.6%. A near-10% drop in just seven weeks, in what has traditionally been a safe-haven sector to park capital, is something few market observers expected to see.

If we go up the maturity ladder and look at the damage to the 10-year Treasury note, we see that the closely watched yield on this metric has gone parabolic.

Remember, as bond prices fall bond yields rise, and risen they have. The yield on the benchmark 10-year Treasury note spiked to 2.71% on Friday, July 5. This was the highest level on the 10-year in nearly two years. In percentage terms, the yield on the 10-year note has vaulted an astounding 37.9% from May 21 through July 10.

If this doesn't constitute a bloodbath, then I don't know what does.

Now, as it so often does on Wall Street, selling begets more selling. So it came as no surprise to me that according to TrimTabs Investment Research, in June bond mutual funds and exchange-traded funds lost a record $79.8 billion.

The changing face of the bond market has many income investors feeling a huge degree of uncertainty, angst and even downright fear about what to do next with their money.

And though I'd like to be able to tell you that the bond bloodbath is only temporary, and that what ails bonds will simply heal on its own, the reality is that I can't.

In fact, we are probably in the early stages of a multi-year bear market in bonds.

You see, there's a new paradigm in the income investing world, and this new paradigm requires income investors to be more sophisticated, more proactive, and simply smarter than they've ever been before.

Gone are the days when you can just buy and hold a long-term bond fund such as TLT and get the kind of yield and share price appreciation that you need to generate the total return you've grown accustomed to in recent years.

The fact is that we are entering a period of higher interest rates, lower bond prices, and lower total returns in traditional fixed-income products.

To combat this new reality, you have to realize that you cannot just do what you've always done. You cannot be a passive observer with your income holdings.

Today, you must be willing to embrace unconventional income securities with growth potential, as well as some relatively more aggressive income-generating strategies.

How to Cope With the New Bond Market

One key way I recommend income investors do just this is to embrace dividend-paying growth stocks in their income portfolios.

While stocks always are subject to market risk, they are much less subject to fluctuations in interest rates the way bonds are.

Moreover, the potential upside you have with high-quality, dividend-paying equities are much more than you would have in Treasury bonds.

Although rising rates are generally bad for stocks, interest rates came off such a low base that there is still plenty of room for them to go up before slowing economic growth and corporate earnings.

In fact, most of our dividend stocks made new all-time highs today while bonds and other traditional fixed-income assets continue to languish.

Another technique income investors can employ to help generate additional return on their dividend-paying equity holdings is to write (sell) covered calls on those positions. While this strategy is relatively conservative, it's certainly more aggressive than a traditional buy-and-hold approach to bond funds.

The key element here when investing in dividend-paying equities, and when using covered calls, is that you have plenty of upside in your favor.

To make your income goals a reality, you simply must realign your mindset and be willing to take on a bit more risk in exchange for greater upside. Doing so not only will net you more income, it also will give you a greater sense of control over your money.

And while taking on more risk and having more control over your income portfolio may seem counter-intuitive, it really isn't.

In today's bond market milieu, the rules are very different-and that means what was once considered risky is merely the actions you need to take to be a successful income investor.

Finally, keep in mind that whether the Fed decides to "taper" its bond-buying program at the September FOMC meeting, or whether the committee waits until next year to begin the tapering, the reality is that the bull market in bonds we've enjoyed for nearly 30 years is in its death throes.

If you want your income portfolio to live a full life beyond bonds, then now is the time to embrace the changing paradigm and invest your income-generating capital accordingly.

Source :http://moneymorning.com/2013/07/15/wading-through-the-bond-market-bloodbath/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules