Of Bonds and Bears

If you’ve been an Alert reader for more than just a couple of weeks, you know that I’ve been saying we are in a bear market. In fact, ever since the proverbial line in the sand at about 1410 on the S&P 500 was breached, we’ve seen several attempts to get back above that territory — yet all such attempts have failed.

Now just as you might expect, the Federal Reserve is trying to revive the economy by the only means at its disposal — a slash-and-burn policy on interest rates. So far, the stock market hasn’t responded well to the Fed’s actions. Certainly, the many wannabe bulls out there haven’t got what they’ve been looking for, as the chart of the S&P 500 here clearly shows.

Right now, we are grappling with a nationwide housing bubble; a credit bust that went way beyond subprime mortgages, and a tapped-out consumer who has overspent and under saved for years. This bear market is causing some observers to believe that we might see a systemic breakdown that could have lasting effects for years to come.

Now I am not quite ready to make that kind of ultra-bearish forecast yet, but I do think that an honest man must face facts realistically.

I don’t mean to sound too negative, but its time to tell the truth about what is happening in this slowdown — even if the results aren’t pretty.

So, if I am right and things in the equity markets continue to be bearish, what is an investor to do? Where do you invest your money for safety and for a decent rate of return?

One area I am strongly recommending right now to readers of my Successful Investing advisory service is bonds. Not just any bonds, but long-term U.S. Treasury bonds.

These bonds do quite well in times of economic turmoil, as money shifts from risky investments to more stable investments. With long-term Treasuries, you get money-fund interest rates AND the potential for some really nice capital appreciation.

Just look at how well the iShares Lehman 20+ Year Treasury Bond fund (TLT) has performed during the past 12 months.

Here we see a nice move higher that looks more like a growth stock than a bond fund. It’s this kind of solid mover that you want to own when stocks are in decline.

The really attractive part of owning bonds right now is that the Fed still is hell bent on lowering interest rates, and by lowering rates so low it could spur deflation rather than the feared prospect of inflation. In either case, long-term Treasury bonds will remain a solid bet — probably for a long time to come.

Want to find out how to easily integrate long-term Treasury bonds into your portfolio?

Just click here.