Scary Wrong Corporate Bond Advice [iShares IBoxx $ Invest Grade Corp Bd Fd, iShares Barclays 1-3 Year Credit Bond Fd]

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May 20, 2014 8:08am NASDAQ:VCSH NYSE:CSJ

scaryI usually start with a bond or stock idea, but I came across some comments about the corporate bond market in Barron’s that were so wrong and could do so much damage to a retired person looking for income in this tough income market that I had to do

this first.

If you don’t already know it, bonds – almost all bonds – have run up in price and yields are at multidecade lows most of us have never seen.

Bonds have run up so much in price because of three factors: the Fed’s easy money policies, its money printing and an increasing demand from a growing population of retired folks for more secure investments. More retired persons looking for safe returns from bonds.

Up to this point the Barron’s article is on target.

But the article then quotes Moody’s Chief Economist John Lonski as having said – I hope this incorrect but I’m afraid it is accurate:

The huge demand by the growing population of retired persons is putting so much buying pressure on Treasurys and high-yield bonds, the risks posed by this high-priced market may be held at bay indefinitely.

I have news for you: Nothing is held at bay indefinitely in the markets, bond or stock. And to make that kind of statement, especially coming from a source as trusted as Moody’s, tells me we are closer than ever to the correction that I have been telling my bond service members to look for almost since day one.

You can buy and hold bonds if – and if you are in the low-risk envelope that all retired persons should be, this might be the biggest “if” of your money life – if you buy only short-maturity, high-coupon bonds at reasonable prices… and they are still out there.

And you can only buy them with the understanding that when the correction hits – and it will – you hold them to maturity. Then and only then can you own bonds.

If you stick with short maturity bonds, the market price fluctuation should be negligible no matter what interest rates do. That’s how the bond market works and it will work if you follow two simple rules.

But for the chief economist of Moody’s to make a blanket statement as broad and as incorrect as his was, and at the same time, to put so much money at risk with such an insane suggestion that a correction won’t happen, is beyond irresponsible.

Bonds are safe and can be held even in this market, but there will be a correction and you must set up your bond portfolio accordingly.

by Steve McDonald, Bond Strategist

Investment U provides cutting-edge research and strategic financial recommendations for all levels of investors through its morning publication Investment U Daily and its related publications.

Related: iShares IBoxx $ Invest Grade Corp Bd Fd(NYSEARCA:LQD), iShares Barclays 1-3 Year Credit Bond Fd(NYSEARCA:CSJ), Vanguard Short Term Corporate Bond ETF(NASDAQ:VCSH)

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