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posted on 22 September 2017

Bonds Send A Signal

Written by , Clarity Financial

Last week, I discussed the various economic indicators suggesting the “Trump Trade" has likely come to its conclusion.


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Interest rates are also currently sending a signal that investors should heed.

As you know, I have been, and remain, a rampant bond bull. Since 2013, as the vast majority of mainstream analysts were touting the end of the “bond bull market," I was aggressively buying bonds.

While we have recently pared back some of our bond holdings and took profits around 2.1% on the 10-year treasury, we remain optimistically long corporate, GNMA and municipal bonds and are looking for the next opportunity to buy more bonds. (When you headlines about the “death of the bond market," that is your signal to buy.)

When the next recession hits the U.S. economy, rates will fall below 1% as money flows to the relative safety of bonds as equity prices lose 30-50% of their value.

More importantly, and as shown below, interest rates on a monthly basis are at levels that have been associated with significant tops in both rates and stocks.

Whether or not you agree, there is a high degree of complacency in the financial markets. The realization of “risk," when it occurs, will lead to a rapid unwinding of the markets pushing volatility higher and bond yields lower. This is why I continue to acquire bonds on rallies in the markets, which suppresses bond prices, to increase portfolio income and hedge against a future market dislocation.

In other words, I get paid to hedge risk, lower portfolio volatility and protect capital.

Bonds aren’t dead, in fact, they are likely going to be your best investment in the not too distant future.

“I don’t know what the seven wonders of the world are, but the eighth is compound interest." - Baron Rothschild

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