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Bond Bears Are on the Loose

Be wary of the media outcry against bonds


Even Vanguard wants to get in on the bearish bond act.

“Bonds have been on a roll for years,” the fund family said in an email blast Thursday, “but nothing lasts forever.” Tune in to Vanguard’s March 28 webcast, the teaser urges, and find out “how to prepare for a possible downturn.”

How often does a mammoth money manager advise you, in effect, to dump one of its major products? This might be a first in my experience. It suggests that bearishness on bonds now pervades the investment community — the perfect setup for a reversal … and a big rally in high-grade bonds, such as Treasuries and municipals.

I’m not saying the reversal will necessarily take place tomorrow. In today’s world of unprecedented psychological herding (groupthink), we’re finding that markets veer off to greater extremes than they did 20 or 30 years ago.

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However, one of my key my technical gauges also hints that the selling spree in bonds is close to exhausting itself.

The accompanying chart plots the percentage deviation between the 10-year Treasury yield (TNX) and its 52-week moving average. As you can see, there have been three major surges in bond yields since the 2008 financial crisis. So far, the current thrust is proving to be the weakest of the three — not the strongest, as you would imagine from all the frantic anti-bond commentary in the media.

From a trader’s standpoint, the best buying opportunities come when negative sentiment meets diminishing downward price momentum (upward yield momentum, in the case of bonds). As I say, it might not be dinnertime just yet, but I can smell the pot bubbling on the stove.

Given the momentum that has built up with record-breaking gains in the main indices, there’s not much to keep the market from drifting somewhat higher over the next couple of weeks. However, each percentage point the indices add from here will borrow from future returns, making the inevitable “correction” all the more severe when it arrives.

I’d recommend continuing to add to the Treasury portion of your portfolio via iShares Barclays 20+ Year Treasury Fund (NYSE:TLT). Or, if you’re in an upper tax bracket, you can consider BlackRock MuniHoldings Quality Fund II (NYSE:MUE). I have more details on that particular fund in a previous article.

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.

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