Posts Tagged 'bonds'

Should I Own Bonds?

With interest rates at near all time lows, many investors are questioning whether they should own any bonds at all. Most financial advisors recommend a portion of an individual’s portfolio be allocated to bonds, and not just for retirees but for younger, more aggressive investors as well. This seems counter intuitive to younger investors who generally feel that they have time to weather investment volatility and should maintain allocations that maximize long term returns.

However in investing timing is always important. While we don’t know when a market correction will come, we know one is inevitable. Think of investments in bonds, not as “safe low earning money” but as “opportunity” cash. I can’t tell you how many times I’ve heard investors say that they wish they had had cash available at some point in their investing lives to make an investment at a specific time. Professionally careers are made by a single investment made at a market bottom.

For more opinions, here is a link to an article I was quoted in on whether a bond allocation makes sense for younger investors.

Advertisements

Covestor and MarketWatch Articles

The following article was just posted at CoVestor.com: Don’t Fight the Bank of Japan: DeShurko and Lessons for Investing in Bond Funds was just posted at MarketWatch.

 

Don’t Rule Out Bonds for Income

I recently posted an column at: MarketWatch.com titled: “Why Individual Bonds Remain Very Attractive” While investors are bailing from bond mutual funds – a wise move,  individual bonds do offer protections against rising interest rates not found in bond mutual funds.

 My overall prediction is that rates cannot go up dramatically. With every 1% increase in interest rates, the added amount the government must pay to just pay the added interest cost on the Federal debt, increases by about $180 billion. For perspective, the “sequestration”, the mandated cuts put into place that get the blame for everything bad in the economy, only cut spending by $42 billion (and prevented another $43 billion of spending increases). Simply put, the government and the Federal Reserve have a lot at stake to keep interest rates relatively low for a very long time. That said, a ½% increase across the board seems likely – but only if the economy continues in a positive direction. I think this is a big “if”.

The short version of the MarketWatch article is that many investors think that a bond’s value is fixed, and that they are stuck holding a bond to maturity. The reality is that a bond’s value will naturally increase in value through the first half of its life. This allows a bond investor to sell their bonds at a profit after a short holding period. If rates don’t increase. But even if rates rise, a bond will likely return to its par value several years before its actual maturity date.

 For example I was recently quoted an Ohio municipal 10 year bond, Aa2 rated and insured, a ten year maturity, and a 3.655% yield to maturity. That is a federal and state tax free interest rate. If interest rates do go up ½%, the face value of the bond will drop below purchase price for the first 3 ½ years or so. But by year 5 the bond should be back to what an investor would pay for it today. So in effect, your 10 year bond has come a 5 year bond – paying 3.655% tax free. That is a pretty good deal.

If you own bonds and want to know when an optimum time would be to sell them, contact my office and we will run the analysis for you. If you need more income, or just want to diversify but don’t know where to go, give us a call and we can explain what bonds can do for you, even at a time when everyone is cashing in on their bond funds.

A Troubling Sign from Junk Bonds

The following post originally appeared at MarketWatch.  

In my last post I made the point that there is no reason to extrapolate that the market is going higher or lower simply because it is approaching all time highs. My plan is to look at several indicators that do matter, and see if we can find solid reasoning for the market to continue its advance or correct.

While I had planned on this being a fairly optimistic post, one development over the past week has the potential to be signaling imminent trouble in the equity markets.

Below is a graph of JNK, the SPDR High Yield Bond Index ETF. I follow this closely as it makes up a large percent of our Dividend Plus strategies. As you can see since June of last year it has formed a nice upward trend. The yellow line is its 30 day moving average (SMA), the average price over the past 30 days.  The graph shows that not only has JNK been moving up, but it has been doing so with a fairly low level of volatility as its price has meandered around the 30 day SMA. Just looking at this chart, the recent downtrend is not worrisome, as it is still within its 8 month uptrend.

chart1

However, if we look at the next chart we see a reason for concern. The red and green line is JNK again, but this time I’ve added SPY, the SPDR’s S&P 500 Index ETF. While SPY is much more volatile than JNK, in general they do move in the same direction. Until about two weeks ago. SPY has continued to rally, while JNK has turned decidedly negative.

chart2

While in the short run it would not be uncommon to see a divergence, in the longer term JNK and SPY will trend in the same direction.  Meaning that over this coming week I’d expect either SPY to start following JNK down, or JNK to reverse and start to rally back up to the top of its trend channel.

Fundamentally, JNK is an index of lower quality corporate bonds. In a softening economy companies are less likely to be able to make interest payments on their debt and JNK will go down. In a strengthening economy JNK will tend to rise, as even lower quality companies will obviously perform better in an improving economy. What we have seen over the past few weeks is that corporate earnings have come in and have been slightly better than expected. More importantly most companies have been giving pretty solid guidance s to their expectations for earnings in 2013. This should be an ideal environment for JNK.

The question I will be trying to answer this week is whether investors in high yield bonds are seeing something that stock investors have so far ignored, or has the two week sell off just been a natural short term correction? If so I expect a rally in JNK. If not, we will look to sell JNK and sit in cash until the markets sort themselves out.


bill@401advisor.com • 937.434.1790

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 474 other followers

Go to webpage:

Go to webpage:

Follow me on Twitter

on Amazon

Link to my weekly column.

Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.

Archives

Advertisements