Consider Avoiding Bonds for Now

Monday, September 21, 2009

1092767_red_symbols_1There is currently a large move to bonds and bond funds. The impetus behind this buying interest is (1) investors improving their yields, (2) banks investing (rather than lending) their cash flows, and (3) the Federal Reserve attempting to keep long-term interest rates attractive to borrowers.

Defying conventional wisdom, the market for U.S. government debt is rallying thanks to an unusual combination of buyers including American households, banks and the Federal Reserve. [The Wall Street Journal, 9/21/09, page C-1, “Eager Fed Helps Keep Treasury Rally Strong”]

And the borrowers love it. Corporations sold $41 billion in bonds last week, and the US Government is issuing $112 billion this week. Corporations have a well-deserved reputation of timing their sales well, meaning they could be expecting that bond yields will rise (and prices will fall) in the near future.

Avoiding popular investments and focusing on trend changes tends to pay off, so now is a good time to consider leaving bonds alone and temporarily choosing short-term securities in spite of their low yields.

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