Why I'm Buying Bonds Again

For the last couple of years we have been avoiding bonds like the plague. Our solution was to keep money in cash for an aggressive portfolio. For the allocations requiring bonds we held cash and iShares Lehman 1 - 3 Year Treasury Bond Fund (SHY), a 1-3 year treasury ETF. What drove this decision was extremely low interest rates, an inverted yield curve and lack of a risk premium being priced in.

The landscape has changed dramatically in the last month. For our broad-based aggressive growth portfolio we have taken a position in iShares iBoxx $ High Yield Corporate Bond Fund (HYG), a high yield bond ETF. For allocations requiring bonds, we are now rotating out of cash and SHY and into short term and moderate credit bond ETF funds. To fill this need we are looking at iShares Trust iShares Lehman Intermediate Credit Bond Fund (CIU), and (CSJ), Lehman's 1-3 credit bond ETF fund. We would suggest adding both to any balanced portfolio.

Given the recent changes in the credit market, this moves seems prudent. A potential cut in FED rates should push short term bond prices up. Secondly, funds rotating out of short term bonds into intermediate bonds will push prices up in this maturity range. Additionally, risk premiums are being built into both both bond prices and the yields.

We are still staying away from the long term end of the curve. We suspect there could be a bit more pain here. In terms of HYG, the yield and potential price appreciation cannot be ignored. We believe an allocation can be taken all the way down to a balanced portfolio. Obviously, the percentage represented in each portfolio declines with more conservative allocation.

HYG CIU CSJ 1-yr. chart:

Comments

[phdinsuntan...:]

cut in fed rates?
I dont think so,
Ben needs to demonstrate he deserves the job
and the dollar depreciation is inflationary,
so your bond inbvestment will remain unprofitable,
if you want to risk your money for a good reward
buy venezuelan bonds
:)

2007 Aug 14 02:50 PM

[phdinsuntan...:]

sorry for the b!

2007 Aug 14 02:51 PM