The clock is ticking on “Bubbles Bernanke,” as his QE2 program is scheduled to end June 30. What then? Will government bond yields explode?
A number of respected commentators, including bond king Bill Gross of PIMCO, are bracing for the worst — and it’s not hard to see why. Certainly, the Federal Reserve’s behavior in the wake of the 2008 financial crisis has exceeded, in sheer recklessness, anything attempted by any senior central bank in history.
First, the Fed stuffed its balance sheet with more than $1 trillion of dodgy mortgages (purchased with money created out of thin air). Then, in November, well over a year after the economy supposedly pulled out of recession, Bernanke’s crew voted to buy another $600 billion of Treasury paper.
This massive money printing has undermined global confidence in the U.S. dollar’s purchasing power. One result: A sharp jump in commodity prices, including gold, oil and — most recently — foodstuffs. So there’s ample reason to be concerned that Treasury yields (particularly at the longer maturities) could shoot higher when QE2 expires.
On the other hand, I suspect that the rise in commodity prices will also prove to be self-limiting, as it did in 2008. At $101 a barrel, oil prices have now more than tripled from their cyclical lows in early 2009.
Fuel costs are starting to bite into many companies’ profit margins as consumers balk at price increases. This is obviously a problem for airlines, truckers, cruise operators and overnight delivery services. But it’s also a challenge for businesses right down the line.
What am I driving at? If oil stays where it is (or God forbid, spikes even higher on a severe Mid East supply disruption), the U.S. economy could quickly downshift to a crawl. And that would postpone, perhaps for many months, the bond shakeout that Bill Gross and others fear.
Indeed, haven’t we already witnessed a pretty good shakeout in the Treasury sector (municipals, too) over the past five months? It wouldn’t be the first time that investors have worried themselves sick about trouble tomorrow while the real trouble already happened yesterday.
I’m encouraged by the performance of our own bond holdings lately. PowerShares Build America Bond Fund (NYSE: BAB), the largest single bond position in our Profitable Investing model portfolio, has shown excellent strength relative to Treasuries since the turn of the year.
In fact, it probably wouldn’t take much of a rally in the broader bond market to push BAB above our buy limit at $25.50. If you’ve been thinking about venturing into BAB, better do it soon. Current yield: 6.1%.
The same advice applies to one of our more aggressive mortgage picks, DoubleLine Total Return Bond Fund (MF: DLTNX). DLTNX yields a dazzling 9% (annualized), based on the most recent six monthly distributions. Our buy limit is $11.10. For safety, plan to invest $2 in BAB for every $1 you put into DLTNX.
