Pimco's Bill Gross now has a bearish stance on bonds. If you are not familiar with him, he runs the largest bond fund.
Inflation now has bond investors attention. So for the foreseeable future bonds are going to fall and rate go up in their view.
I happen to agree.
How to profit from this? By using options, we can buy puts on bond ETF's or if you are like me and think it will be a slow process, you can buy a put calendar spread. Might even go the diagonal route. Bonds should take a few years to bottom out. It will be a painful ride for fixed income and pensioners. It does not have to be for you. If you are ultra Conservative here, you may want to get into money markets. Locking CD rates this low as rates go up will not be the way to go. If you are going the money market route, make sure it is a treasury money market fund. The yield will be lower but the underlying security (U.S. Treasuries) should keep their value.
6 comments:
Hi Dell, I am a bit unclear on bonds, maybe you can help me. I put some money in bonds last year and it has depreciated a little bit. Now, since the bonds will see a correction, will the value drop some more, or will it go up since the rate will go higher?
Thanks.
I like blue better
Hi Dell, I am still new to this. I am not sure where to look to get the symbols to trade. Could you give me some help?
Thanks,
Kirk
Bonds move in the opposite direction of interest rates. As the rate goes up, the price of bonds go down.
Think of it this way, if I own a 5% bond and rate goes to 6%, I have to discount my bond to sell it since the market is giving 6% now. If this same 5% bond has rates go down to 4%, then I can sell for a premium since the market is only 4% now.
Yes I like blue better too.
I like ETF's so a bond fund would be TLT for a symbol to watch.
what is "blue"?
It is an inside joke about this blog. I had it peach once and many thought it pink and so I changed the color just recently to blue.
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