By Nigam Arora & Dr. Natasha Arora
We have been receiving many questions on bonds. Here are the answers.
Distinguish Between Investment And Trading
It is important to distinguish between investment and trading. The two have different approaches.
Three Important Points
When buying bonds, investors need to take into account duration, credit quality, and valuation.
The Arora Report forecast is still a 45% probability of a recession in 2024. There is a good chance that the probability of a recession may go up. In a recession, default rates on lower quality bonds increase. For this reason right now for investment, the recommendation is to buy US Treasuries or investment grade corporate bonds. Examples of investment grade corporate bonds are the likes of Apple (AAPL), JP Morgan (JPM), Johnson and Johnson (JNJ), Bristol Myer (BMY), Pfizer Inc. (PFE), and Coca-Cola Co (KO).
Probability based risk reward is not favorable for a duration beyond five years for investment purposes. This is due to rising US national debt and deficits. There is also uncertainty about inflation in the long term and interest rates in the long term.
Bonds move inverse to yield. The longer the duration, more is the potential capital gain or loss. When interest rates go up, long duration bonds lose significant capital. When interest rates go down, long duration bonds appreciate.
50% Loss On World’s Safest Bonds
To understand the duration risk, consider this real illustration. The world’s safest bond is the US 30 year Treasury bond. Investors who bought the world’s safest bond in 2020 are now sitting on a 50% principal loss.
Investors interested in investing in bonds may consider laddering. An example of laddering is buying one year, two year, three year, and five year Treasuries.
Under current macro conditions, the recommendation is to not invest in bond mutual funds.
For many investors, investing in floating rate treasuries or investment grade corporates is attractive. Since the interest rate floats, there is no duration or interest rate risk.
A good ETF to consider is USFR. This ETF invests in floating rate US Treasuries.
Closed End Funds
Closed end funds, when they trade at a discount to net asset value can be attractive but you need to be impeccable in your timing. Typically attractive opportunities arise close to the year end. If attractive opportunities arise they are published in ZYX Allocation.
Long duration bond ETFs are especially suitable for trading. Examples are TLT, TBT, TBF, and IEF.
Currently, there is a trading position in TLT in ZYX Buy.
Investing In Long Duration ETFs
Longtime members may recall that inverse bond ETFs TBT and TBF were included in the Model Portfolios in ZYX Buy and ZYX Allocation at a time when everybody was buying bonds. Inverse ETFs go up when bonds go down. Now investors who were buying bonds at that time are sitting at 50% loss. Our inverse ETF positions have now been exited with very large gains.
There may be a time in the future when IEF or TLT or even TBF and TBT are again included in the Model Portfolios. But that time is not now.
Remember that one of the reasons behind The Arora Reports’ success is that we do not force signals like many brokerage firms and other services. When signals are forced due to popular demand, the firm forcing the signals generates significant revenues as their subscribers become happy due to signals that are popular. However when signals are forced, history has shown that the vast majority of the time they lead to losses in the long term. When the followers of the firms’ forcing signals lose money, they leave those firms and search for new firms. Most firms’ business models are based on very high turnover of investors and extensive marketing to attract new investors.
The Arora Report is very different. Our objective is to maximize the money our members make over their lifetime. Our focus is long term success of our members. We do not force signals. Our business model is very different in that we have very low turn over and we do not spend even a fraction of our competitors spend on marketing. The Arora Report has grown simply through recommendations by existing members to their family members, colleagues, and friends.
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