Cracks in the Bond Market : A Sign of Caution

by | Jun 3, 2007 | Asset Management

Interest rates are on the rise. Why?

In my line of work, we never know the reason why certain events took place — until after they’ve occurred. Then we have to deal with picking up the pieces, or mopping up the spilled milk.

As many people smarter than me have noted, they don’t ring a bell at market tops or at market bottoms. Instead, we need to look for clues or indicators that tell us the sands under our feet are starting to shift. This is why I rely on point and figure charts. These charts tell me (without emotion) simply what’s in demand, and what is in supply. We can draw our own conclusions from there.

Over the last few weeks I’ve been reminding you that we’re living in the high risk neighborhood of the stock market. It doesn’t mean that the market must fall apart anytime soon. But we need to be on our toes and spot the cracks in the foundation.

And then be ready to act on those indicators!

So we may have spotted another crack. This time the crack is coming from the bond market. We’ve noticed that many fixed income investments have been dropping significantly in price recently. This is a sign that supply is starting to take control in this corner of the market.

And remember from basic economics, when there’s too much supply, prices must fall.

Now also keep in mind, in the bond market, when prices fall, bond yields go up. This is a terrific spot to be in if you are about to put money to work in the bond market. It’s not so hot if you just invested money in bonds or CDs recently.

Tom

Thomas Mullooly
Mullooly Asset Management LLC
Our Only Business Is Fee-Only Investment Advice
www.mullooly.net
support@mullooly.net

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