Three Reasons Why Bonds Are Looking Better Than Ever

Three Reasons Why Bonds Are Looking Better Than Ever

It doesn't exactly suggest itself, but in these days of huge volatility, bonds may be the place to stay.

It's counterintuitive, I know--you look around at the massive problems being felt by every government everywhere, with respect to budgets, and you can easily think, "Why would I give these putzes any more money than I absolutely had to?".  But there are plenty of examples to suggest that that bonds are going to do pretty well in the next few years.  I'm seeing a trend start to emerge, and here's what I'm looking at:

1. There are some improvements in the overall economy.  Make no mistake, unemployment is still unsettlingly high.  In fact it's downright chilling how many "ninety-niners" there are out there, a reference to folks who've exceeded their ninety-ninth week of unemployment and thus run out the clock on their benefits.  But nine out of ten people are still employed, and some evidence is showing that consumers are starting to spend again, if not at the previously high levels they were, and companies have just about stop hemorraging employees. 

2. An aging populace.  This is the eight hundred pound gorilla in the room, folks.  The boomers, as we all pretty much expected they'd do, are getting older and they want to retire.  Not surprising, really.  But they know that there's a real good chance they'll outlive their money, especially the way things have been going, so they're looking for good return and maximum safety.  So they're moving in the direction of bond funds, and that's giving bond fund managers LOADS more capital.

3. A meticulous analysis of history.  Past performance may not be a guarantee of future performance, but it's the best indicator we've got.  A lot of people suggest that the unemployment rate peaked back last October.  And if that is in fact the case, a rise in the Federal Funds Rate generally follows about a year after the fact.  If a hike in the Federal Funds Rate is on the immediate horizon, as some think is the case, then so too is a hike in virtually every interest rate, including bond rates.

So when you consider those three points--improving economy, aging populace, and historical values--you get a distinct possibility that bonds will be the place to be for some time to come.

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  • Selwig

    May 04, 2010

    It depends on what you mean bonds will do well. Some of the trends you mention fight each other in terms of bond pricing. For instance, an aging population increases demand for bonds, which keeps yields low. An improving economy increases bond yield. Rising bond yields lower bond prices, which are extremely high right now. If bond yields rise and prices drop, those holding bonds now will see their principal decrease. This is a dangerous time to buy bond if you expect that to happen. If you expect yields to drop - which seems doubtful - then now is a good time to buy.

  • SteveAnderson

    May 06, 2010

    Selwig---don't forget that the aging population is demanding both safety AND yield. That's going to drive demand but for higher yield issues.

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