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Money Focus Debt Consolidation
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The Bond Reaction
Unfortunately, the long look at risk is what is left when economic reports continue to point towards growth however modest and with that, chance for inflation. Add to that the steady overseas appetite for U.S. bonds, a three-month T-Bill with a better yield than its longer counterparts and the inability of investors to demand higher long-term reward for their investment.
This leaves bond investors and especially those that favor them in mutual funds in a bit of a dilemma. For individual investors, this means chasing much higher risk with less desirable junk. Companies seem to be willing to pay their bills in much shorter terms and worse, there seems to be so much investor cash available that corporate bonds, no matter how narrow the spread seem attractive. The spread, the distance between a high-yield corporate bond and a ten-year Treasury is at its narrowest in years. This pushes bond prices higher as competition for a few offerings increases and as a result, yields fall.
Some traders don¹t see this continuing for much longer. A crisis in confidence the last happened in 1997 when Asian currency melted while Long Term Capital Management, a hedge fund self-destructed, is all it would take to change directions and turn the yield on junk through the stratosphere.
For the Bond fund investor, these are very difficult times. Risk is everywhere with some unsuspecting investors taking on mortgage risk in their fund unwittingly. Traders and fund managers are waiting for the shoe to drop as well. A shock in oil prices, the sudden drop in the dollar, and a rash of either corporate or mortgage defaults would catch numerous fund managers unawares.
Indexing whatever bond holdings you have, while the equivalent of staying out of the game might be the best bet for the savvy investor in the next six months.
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