Is this not the fast which I choose, To loosen the bonds of wickedness,
To undo the bands of the yoke, And to let the oppressed go free. 

So go the words of the Hebrew prophet, Isaiah, chapter 58, verse 6. And while deep with religious and cultural meaning, I would recommend loosening your bonds in a much different manner.

Despite my belief that interest rates will go lower and remain low for some unusually long period of time -- an “extended period,” to borrow an expression from another sacrosanct institution, the Federal Reserve -- I also believe that individual investors who have taken on the yoke of financing U.S. deficits, and re-filling corporate coffers, by purchasing nearly $600 billion of bond funds in the last 30 months, ought to let loose some of those bonds, lest they be judged harshly by the trading and investing gods.

Bonds have been in a secular bull market since 1982, where yields on the longest-dated Treasury bonds, of the 30-year variety, have fallen from a high of over 14% to below 3.5% earlier today.

Similarly, 10-year Treasury yields fell below 2.5% early today, the lowest level since the spring of 2009, while 2-year Treasury yields touched a record low of 45 basis points, less than one-half of 1%.

 



This is how many bull markets end -- with a blow-off rally in prices which, in the bond market, means an enormous move down in yields. (Bond prices and yields move in inverse lock-step.)

While the decline in bond yields reflects the very real risk of a double-dip recession and deepening deflation, long-time holders of fixed-income securities can book enormous profits from the bond-buying binge by selling at least some of their bonds, or more precisely, bond funds, and park the money in cash until a buying opportunity re-emerges in bonds, or even stocks, for that matter.

It’s true that if the economy weakens further, the Federal Reserve will do even more to push rates down farther and for a longer period than most currently expect. But a further rush into Treasuries, especially Treasury bond funds, may be an ill-advised and ill-timed move for individual investors.

Should the economy and stock market rebound, as stocks did today, bond market interest rates could rise, pushing bond prices back down and cutting the capital gains that one may have had in his/her bond portfolio.

Even more troublesome for bond fund holders is the fact that bond funds, unlike individual bonds, do not have a maturity date. True, you receive the safety of a Treasury investment by purchasing T-bonds through a Treasury bond fund. But, there is no guarantee that your principal will be returned in full when you go to sell it.

The price of the bond fund will move with bond prices, so if rates go up and bond prices go down, the value of your investment will fall and, likely, fall hard. And should you buy a bond fund when prices are high and, conversely, yields are low, you are less likely to receive an interest rate payment that compensates you for the risk you are taking by betting that rates will decline more than they already have.

Contrast that to the holder of an individual bond, rather than a pooled investment vehicle, who can hang on to the actual bond until it matures, receiving 100% of the principal back, as well as the interest payments that were paid out over 2, 5, 10 or even 30 years.

After a 28-year bull market in bonds, I remain somewhat bullish on fixed-income products. But, I would be very cautious about following a panicked herd that has fled for over two years to the relative safety of Treasuries.

Cash-rich corporations and states with improving finances, however few those may be, are currently much better vehicles for fixed-income investment dollars than U.S. Treasury bond funds.

The herd shed the stock market’s yoke, beginning in 2008, and in the last seven months has swapped another 33 billion dollars of stocks for bonds. I am afraid that, for the third time in the last 10 years, the herd, slaughtered by Internet stocks and real estate, may feel the yoke of oppression from rising interest rates and falling bond prices, never realizing that the safety of bonds can be as ephemeral as any other Earthly investment.

A besieged group of bond-holders, all trying to escape a falling market at the same time, could prove chaotic and devastating to those who sought refuge in a shelter that holds far too many refugees today.

You can profit from the prophet Isaiah… loosen your bonds now, before your bonds lose you.