Bonds Are a Potential Powder Keg in the “New Normal”

Thu, Sep 29, 2016 - 4:16pm

Thoughts from our recent Big Picture podcast, "A Strong Defense Wins Championships," which can be listened to in full on the Newshour podcast page here or on iTunes here.

“Despite low yields on safe assets, investors are reaching for duration rather than risk,” says Jim Puplava.

Duration is the overall maturity value of a bond portfolio. Investors are buying bonds with longer maturities because those are the bonds that appreciate the most when interest rates go down.

Investors have been accumulating large position holdings in these safe securities because of the rate of return they offer, Puplava added.

However, the danger here is that longer maturities mean a greater potential for capital gains AND a greater potential for loss.

Going Forward, What Can Investors Do?

All of this means that low-interest rates are forcing investors to take more risks. It’s likely that this search for yield in this low-interest rate environment may be contributing to financial imbalances, Puplava stated.

Everybody is making bets based on the notion that this low-interest rate environment will persist, and monetary policy will be eased with any kind of market turmoil. But what if interest rates rise?

The danger is, it’s possible everyone is sitting on illiquid bonds. With a weakening business cycle in the US and lower corporate earnings, if we head into another downturn, the likely candidates to spark the next crisis are outside the US. “Investors have to be defensive here,” Puplava noted.

But what that means isn’t necessarily what it may have meant in past crises, he noted. He’s advocated putting capital into short-term bonds, building cash to wait for a buying opportunity, holding some gold as a currency hedge, and also holding high-quality blue-chip stocks with good track records.

“We are now on a decelerating glide path in the US economy,” Puplava said. “It’s not getting better. Economic growth is decelerating, and the markets are becoming more risky.”

For more information on current economic and financial trends, you can listen to this full Big Picture podcast with Jim Puplava, founder of Financial Sense, on our Newshour page here or on our iTunes page here. Subscribe to our weekday premium podcast with various guest experts, strategists, and book authors by clicking here.

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