This move up in interest rates should not be a surprise to my readers, as you’ve been hearing me discuss this issue since last December, when I opined that the worst investor mistake you could make is to remain heavily invested in long-term bonds.
Obviously, with the market sentiment shift we’ve seen in bonds over the past couple of months, if you adjusted your investment strategy at the time that I warned my readers, this would’ve saved you a significant amount of money.
While some might consider entering the fixed-income pool once again by increasing their share of bonds for their overall investment strategy, I would still caution against making such a move.
I do agree that market sentiment has shifted dramatically, which can, at times, provide an excellent entry point. However, because of what I foresee occurring over the next six months, I would still rate long-term bonds as the worst investment you can make right now.
To begin with, I believe there is a high probability that the Federal Reserve will begin reducing its asset purchase program this fall.
If market sentiment is weak right now for bonds, do you really think it will improve if the largest buyer of Treasuries decides to reduce its purchases? I think the exact opposite will occur, with more institutions shifting their investment strategy away from long-term bonds.
You might state your belief that the economy is not strong enough for the Federal Reserve to begin adjusting monetary policy. I would agree that even though the economy is not growing at a very fast rate, it is still improving. The asset purchase program was put in place as an emergency measure; I think we can all agree that the economy is not in a state of emergency at this time.
Now, I am not stating that the economy is perfect—far from it. However, the emergency measures put in place by the Federal Reserve should not remain in effect for much longer. All they’re doing is creating potential for new bubbles to expand.