Commentary on the Bonds. 08-29-10

My personal opinion is that interest rates have to rise.  That is a personal opinion.  Here is the problem.  The Fed is doing everything in its power to keep interest rates at some of the lowest levels seen in years.   Here is the reason that I don’t short the bonds.  The question is how low can interest rates go.  With the fear factor I have not idea.  But I will give you one reason not to short the bonds.

Let us start the example with $1000 bond yielding 10%.  That makes and interest payment of $100.  If interest rates go from 10% to 9% the result is that the value of the bond goes from $1000 to $1,111.11.  Basically a 10% risk factor.  Simple math.  100/.09=1,111.11.

Now let us do the same thing in today’s environment.  If a $1000 bond yields 3% the interest is $30 and if interest rates drop to 2% the value goes to $1500 and if a $1000 bond yields 2% and interest rates drop to 1% that $1000 bond becomes worth $2000.  So the question is do you buy the bonds because of the leverage to the up side in price because of the governments pressure to lower current interest rates or do you short the bonds because you feel that interest rates will rise.  I think that the risk reward ratio is way out of whack at this time to be on either side of this market. 

 Just some thoughts from an old man.  Ira.

Bonds (8-28-10)

Bonds stopped just above the 2nd price objective for the move up and have now hit the entry to the retracement down at 134-21.  The first price objective is 132-10.  This is based on the September contract, the numbers will be slightly different when the bond futures roll to the December contract.  Fed Chairman Bernanke announced this week that the Fed would do everything necessary to help the ailing economy.  The question is how many bullets does he have left.  The answer so far has been to print money and that may continue, which, in turn, could lead to hyperinflation down the road.  However the Fed does not seem concerned about that at this time.  Also, this should be an interesting week with several reports including the monthly labor report.  But we are also approaching a holiday and seasonality implies a rally into the holiday.  Will that hold true this time?  Labor Report vs. Labor Holiday.  Should be a good fight.

Arthur