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Tuesday, October 5, 2010

Protection Against the Bond Bubble

Small investors are piling into bonds despite highly vocal, widespread warnings of a bond bubble. It's time to leave, the water's coming over the dike, and the buses to the Superdome are filling up. If you don't leave now ,you'll soon be on your roof.

I agree with this, except for the timing, and timing is everything when it comes to money. It could be a while before the bubble bursts. The deflation scare could intensify. QE2 could temporarily push longer-term rates even lower.

What's an investor to do? I recommend looking at CSJ, a shorter-term bond market exchange traded fund, or, if you're looking at your 401k, considering a short-term corporate bond fund. CSJ is well diversified, participates in the short-term, corporate bond market and, best of all, has a shorter duration than the overall market. This means these bonds won't decline as much in price. I t is presently yielding slightly more than 3%.

Make no mistake-this bubble will burst within the next 5-7 years, and it will be ugly., For one thing, the younger generation of investors wil,l for the first time, see what inflation is really about.

Disclosure: My clients and I hold CSJ.


  1. Do you recommend hedging a bond position with a short?

  2. No. It's too costly. Instead I take a position in TBT sometimes but put in a stop loss. I've had to close out a number of them at a loss.

  3. Love the screensaver. ;)

    At a first glance, wouldn't the bursting bubble be a deflationary force? Or do you mean that as there is general price inflation, rates will increase, and this will kill the bubble?