Positioning for a Peak in the Bond Market

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Storm on the Horizon

The recent spike in volatility and market losses is likely just a passing squall, but there is something more lurking behind it, says Financial Sense's Jim Puplava.

The nature of this shift lies in the beginning phase of a new bear market in bonds, which is remarkable because we haven’t seen anything like this in 36 years.

Interest rates on Treasuries bottomed last fall, Puplava noted, and have been rising ever since. A part of the shakeup we’ve seen in stocks and bonds is the market adjusting to this new reality.

What’s Pushing Interest Rates Higher?

Two popular ETFs, the TLT, which is made up of 20-year Treasuries, and the LQD, which is made up of high-quality corporates, have both suffered losses since the beginning of the year.

From January, LQD is down 3.3 percent and TLT is down 6.3 percent, Puplava noted. This is just beginning as interest rates rise further, Puplava believes.

First, we are at the beginning of a Fed rate-raising cycle, which obviously affects rates. We’re also seeing rising deficits. The recently proposed budget bill in the Senate increases spending over 2 years by an addition $300 billion, and in the next 2 years, we could see U.S. deficits rise back over $1 trillion, Puplava stated.

Preparation for the Bond Bear

The most important steps investors can take are to shorten the duration of their bond holdings, own individual bonds, and use a laddered bond portfolio.

The nice thing about owning individual bonds, is that when the bond matures in 5 years, for example, you get your money back to be reinvested at a higher interest rate.

Both laddered bond portfolios and short-term bond funds help preserve capital as interest rates rise.

Puplava also likes to incorporate interest rate floaters, or adjustable bonds, into his strategy. These reset quarterly to the prevailing interest rate, maintaining returns in a bond bear market.

Another option is to use actively managed bond funds, which employ several strategies to protect capital.

Paradigm Shift Imminent

Stocks, bonds, and commodities are all moving into new phases with the changing of the business cycle. We’re witnessing the transition to a period of rising interest rates and inflation, and a falling dollar.

The sequence of market tops typically sees bonds peak first, followed by stocks and then commodities, Puplava stated. Both stocks and commodities have further to go, he believes, but we’re likely to see market leadership change to an inflationary bent.

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