3 Ways to Play the Bond Market Bubble

Limit your exposure without pulling out entirely

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Bubble 3 Ways to Play the Bond Market BubbleTo hear the “bond bubbleistas” tell it, the bond market is poised to collapse the second interest rates start to rise.

But if you’re thinking about dumping all of your bonds, you should think again.

Yes, rates will rise — but not as fast as many analysts are forecasting. What’s more, even if rates do increase, the price risk is not as bad as you might think.

That’s why the more appropriate strategy is to simply reorient your bond portfolio, rather than pull out all together.

Don’t get me wrong. I’m not trying to make light of the global financial crisis or our current situation, but people have been calling for an “end” to bond markets, in one form or another, for quite a long time.

Failed Forecasts

PIMCO cofounder and fund manager Bill Gross actually has called for an end to bond markets twice, most recently dumping all government bonds in early 2011. He’s since admitted he was wrong and piled back in. Granted, his business is bonds so he had to, but the point is moot.

PIMCO investors paid through the nose in lost performance though. The PIMCO Total Return Fund (MUTF:PTTRX) was up just 3.2% as of August, trailing more than 70% of its peers and lagging the 5.6% return of its benchmark index, according to Bloomberg.

Meredith Whitney famously called for the $3 trillion muni-market Armageddon in November 2010. Her clock is about up and she’s mentioning nothing about her prediction in recent appearances, despite turning the bond markets upside down for months.

Even economist Nouriel Roubini has eaten crow when it comes to bonds. He called for the complete meltdown of everything we knew to be true in 2004, 2005, 2006 and 2007. While he’s since become a media darling, his predictive record is less than stunning. Journalist Charles Gasparino, who investigated Roubini’s track record, noted that he couldn’t find a “single investor who regularly uses his research.”

My point is not that any of these incredibly smart people were wrong — everybody is wrong from time to time — it’s just that investors risk a lot by not “risking” anything.

Let me explain.

No Substitute for Stability

Fueled by banking blunders and the European banking crisis, U.S. Treasuries have not only risen this year, they’ve rocketed so high that in August the benchmark 10-year yield dropped below 2% for the first time since 1950 and traded at 1.99% Thursday.

That means investors who hung in there, despite the risks and the hype, have enjoyed a nice return from bond appreciation even as they continued to reap the benefits of the yield those bonds kicked off. Those who bailed out did so prematurely and got left behind.

So what’s going to happen to the bond market when rates rise?

When rates do eventually start to rise, bonds will decline — but not at the pace many fear. How do we know that? Because there is precedent.


Article printed from InvestorPlace Media, http://investorplace.com/2011/10/3-ways-to-play-the-bond-market-bubble-pttrx-ryjux/.

©2014 InvestorPlace Media, LLC

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