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    Don’t Get Bamboozled By Bond Bubble Blatherings

    Bubble, bubble, toil and trouble: It seems that the doom-and-gloomers out there are at it again. This time, they’re cooking up a cauldron of fear over an alleged pending bond bubble.

    With interest rates in the United States at such low levels, the financial guru set and the talking heads on financial television are trying to scare investors into making some bad calls when it comes to their portfolios.

    “Bubble” is one of those great charged words. After all, we had the housing bubble, the financial bubble, the tech bubble and the dot-com bubble, all of which ended poorly for investors who weren’t prepared to understand what troubles were lurking behind the markets that would end up with some nasty sell-offs.

    So now we’re told that we have a bond market bubble. And you’re supposed to get all scared that the bond market is about to plunge in price and soar in yield. In turn, you’re supposed to panic and dump all of your bonds and get hunkered down and watch the bubble pop with a deafening explosion that’s just waiting to happen.

    But the trouble with this call and subsequent course of action is that it won’t do much more than cause investors to lose out on what is set to continue to be a good market.

    The key is that bonds, perhaps more so than stocks, are diverse investments that do not all move at the same pace or in the same direction.

    And while some of the doom-and-gloom gurus might have it right about bonds being wrong for your portfolio, they’re missing what is actually happening.

    The bond market has actually seen some large-scale selling and higher interest rates over the past several weeks. Yet the sky didn’t fall, and the market didn’t implode.

    U.S. Treasuries have indeed been a bad market recently. The benchmark and critical 10-year maturities have seen yields rise from near-term lows of 1.3 percent to near 2 percent. That appears to be small in yield, but it’s quite large in percentage terms.

    The funny thing is that other parts of the bond market didn’t sell off. In fact, they actually have been rallying.

    So has the bubble burst or not?

    Leaving The Parking Lot

    U.S. Treasuries have been a massive parking lot for investors from around the globe seeking a safe place to hole up while the economies and markets recover from the legitimate financial and housing bubble bursts.

    In the process, Treasury yields fell to the floor as so many kept buying bonds. To add to the demand, as I wrote in Invest With The Fed For Higher Yield, the Federal Reserve and its Federal Open Market Committee (FOMC) have been buying with abandon billions upon billions of dollars’ worth of Treasuries for a long while now.

    Now, we’re seeing two things in the bond market. Treasuries are up in yield and down in price. And the money that’s coming out of these bonds is going into other facets of the bond market that were down in price and up in yield and that represent some great buys.

    Take muni bonds for example. While Treasuries were selling off (particularly last month), muni bonds had one of the best overall returns in years even with some $24 billion worth of new issues adding to supplies in the market.

    Corporate bonds, which also had some good issuance, still rallied despite what the gurus said would happen with the bond bubble burst.

    Of course, some of my favored international bonds with big yields continued to perform over the past month, even with Treasuries being sold off.

    You’re getting the picture that bonds are certainly not all alike, nor do they perform in sync with each other.

    Steer Clear Of The Parking Lot

    You should’ve already left Treasuries and been buying other opportunities for some time now. But if you haven’t, take your cash out of Treasuries. Sell the bonds and move your cash into other, much better bonds with higher yields.

    Treasuries are fine for parking cash and for trading for those who are timing the buying and selling of these sorts of bonds. But for investors, Treasuries have always been a bad deal.

    First of all, Treasuries are priced to fail. With U.S. Treasuries still pretty much at the top of the ratings list, they are priced to fall. You can’t get an AAAA rating. But, as the U.S. government is learning, you can go to an AA or worse with the resulting fall in price and rise in yields commanded by the markets.

    Secondly, Treasuries have lousy yields. Avoid them and seek better opportunities.

    Those opportunities should be in three areas of the bond market that have not only been surviving the Treasury market bubble burst, but have been beating Treasuries for years and years — especially the past three years during all of the financial skullduggery.

    First, recall my ongoing recommendations for global bonds from Nations and markets that are not only paying a whole lot more but are also improving their credibility and creditworthiness, which is driving prices higher.

    And to make it easier, I’ve noted the closed-end investment companies on more than one occasion in this column that include AllienceBernstein Global High Income Fund, Inc. (AWF); Templeton Emerging Markets Income Fund (TEI); Legg Mason Partners Income Trust – Western Asset Emerging Markets Debt Portfolio (ESD); and PIMCO Strategic Global Government Fund, Inc. (RCS). The combination continues to generate an average yield paid mostly monthly of near 9 percent. And they’ve continued to turn in double-digit overall total returns year in and year out in most cases for more than a decade, including all of those times when Treasuries were in trouble.

    Second, buy muni bonds. This past month was yet another with positive overall market performance despite the Treasury sell-off. And with some State and local issuers, including (of all States) California, getting a rating hike by Standard & Poor’s, the market is slated to do even better.

    I’ve been telling you what to do with international bonds; do the same with muni bonds. I’ve written in the past to buy closed-end muni investment companies, including AllianceBernstein National Municipal Income Fund, Inc. (AFB); BlackRock Municipal Income Trust II (BLE); and Nuveen Quality Income Municipal Fund, Inc. (NQU), with an average yield with tax advantages of about 6 percent and gains that for the past year generated double-digit overall returns.

    Third, look at individual corporate bonds — especially in the form of my recommended mini-bonds. These are the bonds that trade on the New York Stock Exchange and look to the casual observer like preferred stock. But they’re regular bonds just made into easier $25 or so face amounts, and they pay their coupons typically on a quarterly basis.

    Right now, look at a bond from Sprint being bought by Asia’s heavily capitalized Softbank, which will result in a huge gain in financial capability. It has a minibond trading under the symbol of PYG that’s yielding more than 7 percent with some potential further gains to come.

    Sell your Treasuries, thank the gurus for their advice, ignore it and in the process get more yield and some gains to come.

    — Neil George

    Neil George is the editor of By George, an investment advisory publication. George was the editor of Personal Finance for many years. In addition, he served as editor for a collection of other investment journals published in the United States, Germany and other selected nations. Prior to his career in media, George worked for more than two decades on six continents in senior positions with a select group of financial institutions in investment banking, bond trading, brokerage and asset management. The institutions included Merrill Lynch International Bank in Europe, Asia and the Americas, as well as U.S. Bank and British- and Chinese-based Investec PLC. In addition, George worked to build a collection of independent public and private brokerage and fund-management companies in Los Angeles and New York. He also currently serves as an adjunct professor and board member of Webster University's Walker School of Business and Technology. George earned an MBA in international finance from Webster University in Europe and a bachelor's degree in economics from Kings College.

    | All posts from Neil George

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