Bond Investor Pain
Research for Online Investors

by John Dalt

12/10/10

We have warned about investing in bonds for the last six months. Interest rates were held down by the Fed buying spree in Treasuries. This was a set-up for fixed term investors. The last ten days has caught a lot of sophisticated investors with their pants down, (and bond prices). Since the last day of November, 20-year treasuries have lost 5.3% of their face value due to climbing interest rates.

The Wall Street Journal has a good article out today about the dangers of falling bond prices and what it means to individuals and the economy in general.  We wrote about Bubblicious Treasuries on August 24th.

What happens when interest rates go up?  Investors lose money in their portfolio, interest rates rise for real estate mortgages and corporate borrowing.  Home loan interest rates have already jumped which will slow the recovery in the depressed home market.  Higher borrowing costs for corporations means lower profits, which will transfer to either higher multiples of profits/stock prices, or lower stock prices.

One of the issues causing turmoil in the bond market is Build America Bonds (BAB).  BAB were created in 2009 to help municipalities borrow money during the credit crisis.  They are set to expire at the end of 2010.  They are not reauthorized in the tax law brokered between Obama and congressional republicans.  The Federal Government subsidizes 35% of the interest payments on BAB.  With their disappearance, California needs to find another way to sell their paper.  We wrote about BAB and California’s use of them to plug their budget gaps in California Debt Climbs on 11/09/10.

The bond market for the last six months has been a sucker bet.  Enticing investors that were looking for safety, and now they are stuck with low returns or a capital loss if they want out.  We were ready to start a bond advisory service in late June.  We had an experienced bond man ready to go, but why start a service that was doomed to fail?

I couldn’t (and still can’t) see a way to recommend bonds as investments while the Fed is prepared to drop money from helicopters.  If we start anything with bonds, it will be short term for trades and capital gains, but investment…not to my worst enemy.

Follow up on our precious metals recommendation.  We noted the opening in the Chinese market for investors to buy gold in an etf that owns gold.  Our mistake, it is a mutual fund that invests in gold ETFs.

Last year China imported 45 metric tons of gold.  As of the end of October the Middle Kingdom has imported 209.7 metric tons in 2010, according to the Shanghai Gold Exchange.  The Gold Exchange Chairman, Shen Xiangrong said “Uncertainties in domestic and global economies, and increasing anticipation of inflation, have made gold as a hedging tool very popular.”

We agree.

To the mailbag:
Mr. Dalt, can I send you a check for my subscription?---renewing subscriber Pickleman

John’ reply:  Yes, our company name and address are on the website in the lower left corner.  Just send us the check, we will acknowledge it with an email and start/renew your subscription.  Please include your email with the payment; we will take care of the rest.

Thank you for answering my question.  We really do appreciate your time for us.  It is almost unbelievable that someone would take time for US!-paid up subscriber to Buy, Sell, Hold service  A.B.

John’s reply:  Anything I can do to make investing easier for you and to help you make money is part of my mission.  Please do not ever hesitate to ask.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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