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Subject: Long Bond Assassinated!

~~~~~~~~~An Excerpt~~~~~~~~~~~~~~~~~~~~~~~
" the end of the day it's Uncle Sam effectively trying to reduce long-term interest rates." - Paul McCulley, Pacific Investment Management Co., October 31, 2001

I could hardly believe my ears. As I was diligently working on the new November issue of our private Zeal Intelligence newsletter for our clients (this month we discuss radical-Islam's strategic mission, the war, inflation, oil, gold, equities, the US economy, specific stock and option trades, etc), a stunning announcement leapt out of the mindless CNBC background noise.

I was not even remotely paying attention to the low-volume bubblevision perma-bullish cheerleading for the markets, but as the news hit the wires my subconscious went into shock and my head jerked up to look at the tube as if Mike Tyson had blasted me with an uppercut. I probably would have been less surprised if the talking-heads on TV had said that the DJIA had rocketed up 5,000 points in the first hour of trading!

But, alas, even as I refused to believe my eyes and ears, the talking-heads claimed that the US government was assassinating a grand old friend of traders and a stalwart pillar of the financial markets, the noble Long Bond. Although I can't prove it, I am sure I shed a tear or two as the dire news sunk in. Halloween 2001 was certainly a dark and evil day that will live forever in financial market infamy.

The benchmark 30-Year Treasury Bond has been around since it first sprung from the womb in early 1977. In somewhat of a paradox, the Long Bond was not even 25 years old when it was cut down in its prime. The US Treasury announced the suspension of all sales of new 30-Year T-Bonds, although existing instruments can still trade until the government buys them back to retire them. The Long Bond has been eagerly watched with awe for decades, carefully monitored by big and small market players worldwide.

The Long Bond was so celebrated and watched carefully with such great affection because it was a critical bellwether for bond market future-expectations of inflation. In addition, it had three attributes unparalleled in the world of intangible financial instruments.

First, sovereign debt issued by the US government is considered "risk-free" in most financial circles, so the yield on the 30-Year T-Bonds was the ultimate long-term proxy for divining the current opinion on future inflation. As there was no default or credit risk attached to the instruments by the market, they were perceived as pure unadulterated proxies for future expectations of risk-free nominal returns, which include inflation.

Second, it was the lowest possible risk financial instrument with a time horizon decades into the future, so investors and traders could monitor the Long Bond's movements as they tried to build inflation and "risk-free" long-term interest rates into their long-term financial models. Since we mortal humans usually live for less than a century, and our useful investment years are about half a century, the rock-solid financial commitment behind the Long Bond for three decades into the future was truly the ultimate long-term instrument in the chaotic financial arena.

Finally, in addition to having an exceedingly long time horizon in today's short-term quarter-to-quarter feeding-frenzy of a financial melee, the Long Bonds had the advantage of, well, being bonds! The overall bond markets are larger and far more sophisticated and professional than the speculative froth of the equity markets.

Bond traders and investors are generally very knowledgeable about everything in the financial markets. They watch bonds, they watch stocks, and they carefully monitor the overall health of the US economy. Your neighbor's bored 12-year-old kid probably isn't going to be day-trading bonds in his spare time! Professional bond market players are held in awe by the markets as they seem to operate on a different plane than the rest of us.

These three crucial attributes made the Long Bonds unbelievably important. They were issued by the best credit risk on the planet, the US government, they covered an enormous chunk of time in the future, and they were traded by elite financial professionals who truly strive to understand markets and not just cheerlead for Wall Street puppet-masters.

The Long Bonds will be sorely missed by investors all over the world. The US Treasury's surprise Halloween announcement that it was selling no more new 30-Year Treasury Bonds was truly extraordinary and a landmark event in the modern history of the financial markets."

There are some people out there wondering what to do NOW (as was I), and I came up with this selection of alternatives: government agency bonds, Ginnie Mae funds, and REITs. Or, you could just ladder the shorter-term maturities out there still available. Another possibility--haunt the secondary market for the long bonds still floating out there.

Some folks who are devotees of the Vicki Robin and Joe Dominguez book and lifestyle outlined in "Your Money or Your Life" are wondering what to do now, because the Financial Independence (FI) portion of the lifestyle plan was based on the 30-year bond....and now, subsequent planned investments can no longer be made to lengthen the FI part of the plan. Vicki herself suggests either government agency issues or haunting the secondary market on the New Roadmap Foundation website...I searched out the other alternatives myself.

If you find yourself in this situation, please do not hesitate to research these suggestions, as I am not a qualified financial planner for anyone but myself, and I cannot assess your tolerance for risk--especially over a message board. I strongly DO recommend shedding the widow's weeds and shop for your own alternatives.

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