Corporate Bonds: The Next Safe Haven?

In the New Normal of low interest rates and low returns, institutional investors engage in a Global Scramble for Yield which makes them stretch for a few extra basis points, often assuming a disproportionate level of risk, as we all found out since 2007. Now we see a whipsaw market, which bounces between a jump back into risk or a Global Scramble for Safety, such as the run on gold coins that infected Europe after the Flash Crash. When the obvious safe havens get driven up, such as Gold, Treasuries and even cash (Dollars); and the hoped-for safe havens get their day, such as Munis; where to put the marginal safe investment? Jennifer Gordon of ForexIndicators.net (not .com) weighs in with high quality corporate bonds as the next place to catch before the scramble for safety drives rates down here, too - but with an eye to the exit! 

This is a possible safe harbor not well covered in the punditsphere, so your comments are encouraged. 

CORPORATE BONDS: A SAFE HAVEN, IF AN EXIT STRATEGY EXISTS

By: Jennifer Gorton from ForexIndicators.Net

The financial headlines of late seem to be repeating often-heard themes: markets in turmoil over sovereign debt issues; volatility driven by uncertainty is the current malaise; the crisis is reminiscent of another time and place; speculators drawn to profit opportunities in the chaos; and the favorite one of all: capital flees to “safe havens” to escape the storm.  After weary traders unwind unprofitable “carry trade” positions and listen to the news channel exhausting their lexicon of “crisis speak”, many begin to search the textbooks for common situations and their solutions.

It was not that long ago, actually September of 2008, when the Lehman Brothers collapse created similar headlines across the globe.  Capital, once again, fled to the Dollar, T-Bills, and precious metals - especially Gold.  Reverse correlations between Gold and the strength of the Dollar no longer held for a period of time until normalcy returned.  As a matter of fact, Gold and Treasury Bonds can provide safe havens at the same time, as the following chart demonstrates for the past decade.

Values for both also appreciated following the 2001 and ongoing 2007 recessionary periods.  Coincidentally, a similar correlation occurred during the Great Depression.  John Murphy, a famous American analyst who has written many books on the subject of interdependence between markets, noted in his writings that the only two assets that rose in value during the Depression were Gold stocks and Treasury Bonds. 

Times were much different then.  The United States was much like China is today, the creditor nation for the world, and the price of Gold was fixed.  Since Gold prices were fixed, many believe that the deflation that followed was a reflection of relative values declining.  However, there were many defaults of sovereign debt issues around the world, so all government debt was not equal.  Keynesian macroeconomic theory was gaining influence over public policy and postulated government stimulus as necessary, in much the same fashion as is favored today.

The interest rate environment for bonds, both government and corporate paper, during the 1930’s favored bond ownership as rates generally declined for the ten-year period.  Earnings plus appreciation in value for quality issues yielded an excellent strategy for consistent performance.  Rates declined for the decade as presented below:

                                                                            1931             1941

3-Month Treasury Bills                             1.40%           0.13%

Prime 4-6 Month Commercial Paper        2.64%           0.53%

30-Year Corporate Bonds                        4.10%           2.65%

Are government bonds, or even higher paying corporate issues, a “safe haven” in today’s market environment?  The best forex indicators tell a story of immediate cross-border shifts of capital.  The huge flow of funds has driven the yield of 10-year Treasury Bonds down near 3%, just a bit above the low levels back in October of 2008.  If rates were to rise, then values for the securities would have to decline to accommodate the market re-pricing.  The great Bond Bull market for the past 30 years would come to a close.  The Fed will most likely delay raising rates to respond to a recovery and stem inflation, but to expect a decade of delay is more than a prudent mind can accept.

Some analysts go so far as to describe bond ownership as far from being today’s safe haven, but more as one of the world’s most dangerous investments.  Market historian and former-merchant-banker Martin Hutchinson believes them to be a ticking time bomb of sorts when he says, “Treasuries are almost certainly in a "bubble" of their own. Not only should investors avoid them, they should also overweight their portfolios in assets such as gold, which can expect to benefit from Treasuries' inevitable decline in value.”

Chris Davis, head of the Davis Funds and third-generation fund manager who overseas over $65 billion in assets, says bonds are an emerging bubble, destined for a fall over the next decade.  He thinks, "The only real bubble in the world is bonds. ... When you look out over a 10-year period, people are going to get killed."  The recent flood of investor money to bond funds may be what they want to do given the uncertain state of stocks, but in the end, he says, “They feel better, but what they are doing is very, very dangerous.”

Bonds may prove to be a “safe haven” for a period of time, but the fundamentals of debts, deficits and interest rates will have their due when the inflationary spiral begins to weave its story.  As any short-term investment trader will advise, be sure to have your exit strategy already planned out before you execute your buying strategy.  The first half of the equation is already written.  The fuse for bonds, whether government or corporate, is burning.  Returns will go to those that have a well-defined exit strategy and the resolve to execute it in a disciplined manner.  Time is of the essence.

Comments

[Account Deleted]

SP 500 price trading near resistance and support lines
http://niftychartsandpatterns.blogspot.com/2010/06/expecting-to-see-some-more-red-candles.html

[da bear]

If this is like the summer of 1930 (which I think it is) you will be better off buying blue chip stocks with great dividends two years from now (the 1932 low occurred in July).

da bear

[Wave Rust]

spike in rates coming as stock markets rally this summer.

after that, a good buy for the safe minded.

wave rust

[Steven_737]

short trigger
NQ 1851.25

not a recommendation

[Steven_737]

targets 1845.75
1841.75

[Steven_737]

exit 1 car at 1845.75
lower stop to 1849

[Steven_737]

lower stop to 1847.5

[Steven_737]

exit 2nd car at 1845.5

[Steven_737]

3rd car stopped at 1847.5

[Michael]

18 days in a row of closing at either the low or high of the day. Incredible.

[HighSchoolKid Trader]

Looks like you're on a roll 737.

That's the kind a tradin' I 'njoi.

Got my Lambo back 'n was havin some fun at the track so missed all the action here today.

What say you 4 tommorrow?

[Account Deleted]

Dow jones end of day analysis
http://niftychartsandpatterns.blogspot.com/2010/06/dow-jones-end-of-day-analysis_15.html

[Roger D]

The Dax has in place a triangular top. Note the exhaustion candles in place at each swing top or low. We had such a candle today,should be a down day starting tonight and that would potentialy put wave "e" in place. A major decline should kick off.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/6dc45707-8137-431c-ac5f-cbe6c891c2d0

[swing trade]

DAX wave C is only 4 bars but wave E is 16 bars?

Labeling on that triangular top doesnt look very balanced and harmonic time wise.

Here is the Neowave balancing which I tend to think the B wave low is in and this C wave could go to new all time highs

[Steven_737]

"What say you 4 tomorrow?"

as far as the 5 min chart and setups go, I cant say anything!
I need to see tomorrow's Opening range.

Regarding the hourly chart my analysis is here:

http://steven737.typepad.com/blog/2010/06/es-spx-analysis-06142010-.html

and

http://steven737.typepad.com/blog/2010/06/nq-ndx-analysis-06142010-.html

As usual, Elliott wave theory produces at least 2 counts.
The market being in a corrective pattern on the daily and H4, allows only for mini trades on the lower time-frames.

cheers :)

[Diamond Jim]

Treasuries, especially long-term bonds, are now the safest thing in the world that pays interest. If we double dip, money will flow to these bonds rather than corporate paper because of the huge uncertainties over what is really on the ledgers of large firms. There has been so much financial hanky panky going on for so long that a ponzi scheme like the US Treasury looks awfully good.

[Roger D]

"DAX wave C is only 4 bars but wave E is 16 bars?

Labeling on that triangular top doesnt look very balanced and harmonic time wise.

Here is the Neowave balancing which I tend to think the B wave low is in and this C wave could go to new all time highs"

Is this a triangle? No

I think this pattern is all about the LT trendline off the March '09 low and the line off the top. The most important short term factor is the exhaustion candle today.

Roger D.

[HighSchoolKid Trader]

Much obligued 737. Know what you mean 'bout mini trades.

Lotta money to be made but only if you can hover all day long.

May need to miss out tomorrow as well but hopefully not.

Kill -em dead tomorrow for me. Take care.