Bond funds have been on my mind lately. I know today is Election Day and some of you are expecting me to opine about the possible outcomes. Meh. No matter who you vote for, government still wins. With the exception of California Prop 19 (vote YES if you're eligible), I'm really pretty disinterested in what is yet another "most important election of our lifetimes".
What I am interested in is what happens tomorrow. Retirees and other bond fund investors better go out and get plenty drunk tonight, because come tomorrow the party is over. Smart money says the Fed is going to kick off QE2 with a bang by announcing at least $500 billion of long-term securities purchases designed to drive inflation higher.
If the Fed goes with the "Shock and Awe" option and just floods the market with purchases all at once, bond prices will rocket higher and yields will plummet. Even the more measured approach of spreading the purchases out over six months or so will have the same effect, albeit slightly muted. This is a very good thing for corporations looking to borrow at low rates, but a very bad thing for long-term bond and bond fund investors and those people who rely upon interest income to survive.
Brett Arends has an interesting commentary today on the current fleecing of bondholders and bond fund investors, likening the activities of the Fed and the corporations to a "heist movie" in reverse - where the big guy steals all the money from the little guys.
We already know that anyone buying these IOUs is taking a terrible risk. If inflation takes off, these bonds will tank. The prices will slump and the coupons will lose their purchasing power.Federal Reserve Chairman Ben Bernanke has all but promised to make inflation take off, one way or another.
He also goes into the corporate shell game of issuing bonds at today's ridiculously low rates in order to take a corporate tax write-off on the interest paid while using the money to invest in foreign subsidiaries where the corporate income is taxed very little, if at all.
The interest payments on these bonds are tax-deductible for corporations; the money comes off the top. So corporations save 35%, their typical marginal-tax rate.These companies can take this money they’ve borrowed from U.S. investors and send it overseas. That will create no jobs here — and if it goes to open a cheap, low-wage factory, may undercut some of the jobs that remain.
If they do that, the corporation may escape U.S. taxation on the profits from that money altogether. That’s because corporations get generous tax breaks on overseas profits.
Great work if you can find it.
If you or anyone you care about are invested in bond funds, get out now. Serious business. You have powerful forces allied against you.
Corporate carry trade, nice.
With all this anticipated inflation, real US wages will drop and workers might be more competitive. That's probably the main benefit to come from the destruction of the USD.
i have been saying this for a while!!!!! but you can write better than I !! damn u edmundo ~!
I'm all over TBT, and another nice little ETF, UCO
careful tbt was meant to be traded not held on to
Hold up. Shouldn't you hold on to your bond fund for at least part of QE2 and see it grow some more and then dump it before prices come crashing back to earth? You don't want to be caught running for the exits too late, but you've got a huge buyer for your bonds for at least a few months here.
I won't say that's a bad idea because it isn't, but the typical bond fund investor (older, retired, etc...) isn't exactly fleet of foot. For anyone who has elderly family member investing this way, I think it's more prudent to take the profits they have now and move into cash.
There's no doubt the funds have higher to go when QE2 hits, but how much higher and how quickly they'll crash is anyone's guess. Best not to chance it with income you live on.
Good point, I'd hate to see the guy in the picture furrow his brow even more.
Putting some money in DGP in anticipation of this.
Doesn't have anything to do with bond funds, but I just found this campaign ad AGAINST Prop 19 and thought I should post it just so no one can say I didn't present both sides of the argument:
Vote No on Prop 19 From a Drug Dealer from Ben GarantThere's a very large difference between owning a bond "fund" and owning 30 year treasuries. High quality short-term bond funds with a diverse portfolio of holdings will weather the storm provided that the average duration of the portfolio is fairly low.
I think you could sit pretty far out on the yield curve for the next 6 months and be "ok". Beyond that it's anyone's guess but Uncle Ben's.
A better hedge is oil, UCO
how would you trade this eddie?
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