Surviving the Bond Bubble

From the Baltimore Clubhouse – Our inbox is filling up…

Due to rising interest rates, rising bond yields and falling bond prices, many investors think the bond market bubble has finally popped.

Folks are selling their bonds like hotcakes. But they’re making a costly mistake…

According to Bond Strategist Steve McDonald, there’s an important distinction to be made before you start throwing around words like “bubble” and “pop.”

In a recent call, Steve explained:

There’s a big difference between corporate, municipal and Treasury bonds. Munis and Treasurys respond to interest rates while corporate bonds don’t.

That’s because Treasurys and munis rely on taxes while corporate bonds rely on company fundamentals. After all, corporate bonds pay the interest and principal from their company’s revenue and earnings per share. So the more stable the company is, the more stable its corporate bonds will be.

Case in point, since the Fed raised interest rates in December, corporate bonds have diverged from municipal and Treasury bonds. 

This suggests that in this rising interest rate environment, short-term corporate bonds are actually less risky than muni or Treasury bonds… and capable of producing higher gains.

The key here is that the holding period for these bonds should be only one to three years.

And there’s a good reason why…

According to Steve, “Short-term bonds have less exposure to inflation, fluctuate less when rates change and get your money back sooner so you can reinvest in rising rates. And they don’t leave you hanging out there for years and years after rates go up.”

That said, there can be some drag on corporate bonds if muni and Treasury bonds react negatively to an interest rate hike.

“There can be spillover in the selling when the dopes who bought corporate bond funds hear the other dopes, the talking heads, screaming bonds are falling,” Steve said. “But that doesn’t mean you should sell.”

If you’re adhering to the Club’s Pillars of Wealth – specifically the Oxford Wealth Pyramid – your portfolio should be protected from any spillover. By diversifying across assets types and investing strategies, you can minimize your risk and maximize your returns.

As a refresher, Steve’s trading service, Oxford Bond Advantage, is in the Short-Term Income segment of the Pyramid.

Most investors believe that income-producing assets are long-term propositions. They’re probably the same investors who are selling their bonds as fast as they can.

But as Steve points out, short-term corporate bonds are much more isolated from interest rate fluctuations than munis or Treasurys. So hold on to your bonds.

And don’t worry; we know many of you are still anxious about bond investing. In fact, several weeks ago, we asked Members what they wanted more of. The most common request was for tips on bond investing.

So we asked Steve to put together a free, educational video to help get the ball rolling. Click here now to watch the video.

If you have any further questions on investing in bonds, check out Sunday’s Market Wake-Up Call interview with Steve and Research Analyst Ryan Fitzwater. It will hit your inbox Sunday morning.

Good investing,

Rachel