In case you missed it, Bill Gross of PIMCO fame, one of the most respected bond gurus in the world, has pronounced April 29 of this year the official end of the 30-year bull market in bonds. This is the second time in as many years that he has made the same prediction.
Needless to say, he was wrong last year, but only on a timing basis. A lot has changed since last year and he could be right, again.
I say again because anyone who does not realize that yields can’t go down much further – we are essentially at 0% now – is kidding themselves. And, a whole lot of retired and conservative investors, who hold the wrong types of bonds in this market, are going to be crucified for their refusal to face facts.
In an effort to get any kind of yield, the average bond investor has been loading up on long maturity bonds and bond funds that have long average maturities and, the real kiss of death, leveraging. Both the long maturities and bonds and mutual funds pay a lot more than the safer alternatives and both will lose at least 30% of their principal when rates turn around.
Thirty percent is the minimum. We could see much bigger losses.
As rates turn around and start their inevitable climb back to reality, all bonds will drop in value. The longer the maturity of a bond, the greater the drop will be. When it comes to bond mutual funds, the same thing applies but it will get much worse.
Leveraging, or borrowing against the assets of the fund, to boost yields is truly the kiss of death for funds. They will literally lose trillions for the uninformed who do not understand either the effect of maturities or leveraging on bond and share prices.
At this point you can own only ultra-short maturities that will limit the downside when the long anticipated turn in rates happens. Anything over a seven years maturity will show big losses. Big does not begin to describe what will happen to longer maturities.
If you haven’t already done it, get out of your long maturities and shift to the shorter strategy. You can still own bonds and you still earn 5% to 10% annually in the right bonds. But, sitting tight hoping the selloff doesn’t happen, or that you can ride out the storm and just collect the interest on your bonds to maturity, is a fools game, and could cost you everything.
Make the change now and make safety of principal your first priority. It is no longer a choice, unless you plan on watching a lot of your money fall into a cyber-hole and never return. You have to do this. Tomorrow might be too late.
Yes, it is that critical!
Editor’s Note: Rumors have been swirling around Wall Street about the Fed curbing its $85 billion/month bond-buying as early as next month. This move will surely spell disaster for bonds. And when it does, it’s all going to hit the fan in a flash. Within just three minutes, it will generate a $93 trillion shockwave that will impact investors for generations.
But some investors will use this event to their advantage, soaking up significant wealth as the bond market tanks. The key is preparing early.
That’s why Marc Lichtenfeld created a report detailing exactly that. He’s discovered a way to earn a quick 164% windfall – followed by years of double-digit dividends.
According to Marc, “These three minutes could make you very rich.”
For his full report on how to prepare, click here.