Popped Bubble
Posted on 06/04/2010 10:57:05 PM PDT by TigerLikesRooster
Bonds: Avoid the next great bubble
By Paul J. Lim June 4, 2010: 5:20 PM ET
(Money Magazine) -- As manias go, this one is different. Your neighbors aren't coming up to you at cocktail parties bragging about making a killing in bonds. No one is flipping fixed income for quick profit. And no talk-radio guru is shouting that bonds will be the only investment left standing after the next financial Armageddon.
Don't let the lack of fanfare fool you. A projected $380 billion will pour into bond funds this year, more than went into domestic stock funds in the past decade. That's on top of a record $376 billion last year.
"The bond market is a bubble," says Robert Froehlich, senior managing director of the Hartford Financial Services Group. "And it's getting ready to burst." One major reason: Despite the recent rally in treasury bond prices and slide in yields -- due to fears over the European debt crisis -- the long-term direction for interest rates is headed higher.
(Excerpt) Read more at money.cnn.com ...
I’m sure about his financial credentials but as an municipal planner I know Robert Froehlich is one smart cookie.
I’m staying 30% bonds. strictly my call. (Thanks for the heads-up though!)
The inflation and interest rate will increase, but when, next year or in two years? The best saving is to reduce debt, otherwise TIPS or short term bonds.
I layered 40% of my portfolio into long term TIPS in Nov., 2008 (when their yield was the same as Treasuries). They have appreciated 25% since then. Been tempted to sell, but I know the coming storm is happening. Their yield is just so low now. I have also taken a position (probably too early) in TBT (20 year inverse bond fund). I see it protecting the interest rate risk portion of my TIPS, but the fund gets hammered when money flows into bonds.
I foresee both stocks and bonds taking a dump when it hits the fan. An unusual occurence, but when the U.S. no longer is viewed as the safe haven - then what?
I just wish I had listened to the gold bugs. I sure would like some of that shiny metal at $800 vs. $1200/oz.
I consider TIPS to be a steady loser, myself. Once inflation starts... and I believe it will as its the only way to cut the real value of outstanding debt... TIPS are a steadily losing investment, because you pay tax on the interest you receive.
Assume you are in a 35% tax bracket, the TIP pays 2% above the government calculated inflation rate, and inflation gets to 8%. What happens? You get 10% interest and pay 3.5% tax. So your real return on a TIP under those circumstances is -1.5% (the 6.5% you keep less the 8% inflation).
Now, TIPS may be the best of a bunch of bad choices, but they will never do very well. On the other hand, they yield a bit more than cash and don’t have the same level of interest rate risk as a regular bond, so you can treat them as a cash substitute and hope you will be smart enough to convert them into something better (like the gold surge we missed) when the time comes.
Since it is in a tax deferred account (IRA), I am not sure about the tax implications. I am not expecting to have much in the way of income in retirement outside of the IRA/401k (lousy company pension and Social Security will be history by then).
When I bought them they were yielding 3% over inflation. I still think this is a solid investment but not my only investment. I view it as my way of achieving an inflation indexed annuity (something us private workers don’t get to have). The other 60% of my portfolio will cycle around with other investments.
Since it is in a tax-deferred account, my comments about tax don’t hold. Of course, in an IRA, you pay a tax at the end, but that’s true of everything in it.
So, you can expect a small real return (2 to 3 percent) over the government’s inflation index. While I believe the government inflation index somewhat understates true inflation, it’s still not a bad deal. Think of it as a way to roughly hold or slightly increase the value of savings. There’s very few reliable “under the mattress” value holders in this world.
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