It’s always amusing to see how the news media try to interpret market events.
Here’s the latest from CNBC: “Exit from the Bond Market Is Turning into a Stampede. ”
Of course, the subliminal message from such headlines is that the stampede will continue, and you had better get out of the way. But that’s not necessarily how markets work. The future isn’t always just like the recent past. In fact, it’s sometimes exactly the opposite.
The crowd was stampeding out of stocks on March 9, 2009 at 6,500 on the Dow. The very next day, they began stampeding back in.
When any market trend reaches the “stampede” stage, it’s worth investigating whether the herd is still full of energy, or near exhaustion. To me, it looks as if the folks selling bonds are well into exhaustion mode.
Consider that, according to Trim Tabs, investors have redeemed $48 billion of bond mutual funds so far in June, the largest outflow for any month on record. Sounds impressive, until you ask which month was No. 2.
That was October 2008 — the absolute bottom of the last bear market for corporate, municipal and emerging-markets bonds. Hundreds of closed-end bond funds made climactic lows that month that have never been seen since.
So, contrary to what the media spinmeisters want you to think, record fund outflows — in bonds or any other market sector — don’t constitute an automatic sell signal. In most cases, those lopsided numbers are simply pointing to a superior buying opportunity.
The best strategy right now is to diversify by owning a variety of bond funds — the Double Line Total Return Bond Fund (DLTNX) is a good place to begin. At the moment, mortgages, which make up the vast majority of the fund’s portfolio, are among the least risky higher-yielding bonds, since the Federal Reserve is buying $40 billion of them each month.
Three-quarters of the fund’s holdings are rated investment grade, and as a further precaution, portfolio manager Jeffrey Gundlach keeps maturities short. The fund’s duration, which measures how long it would take, on average, for the fund to get all its money back (principal and interest), is around two years. Yet, in spite of the fund’s short-term orientation, DLTNX yields 5.13%.
That’s a superb payoff for a fund that doesn’t tie up your money in long-term paper.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation. Band holds DLTNX in his Profitable Investing portfolio.