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Subject:  Re: Investing in bond funds for trip down Date:  9/12/2007  11:19 AM
Author:  Lokicious Number:  21569 of 36623

I'd like to know if this seems like a good short term strategy for a declining market:

In my IRA, I've been liquidating equity based index funds and moving their proceeds into MMF. If I believe the market averages are going to go down rather than up over the next few months or year. Aren't bond funds the ideal place to be? Not junk but Aaa.

For example, Vanguard Intermediate-Term Treasury Fund Investor Shares (VFITX) It's fund price runs opposite of the S&P500. If the S&P500 is up as it has been, I'll be buying VFITX low. When the S&P500 goes down, VFITX will be high. If I sell VFITX as the market bottoms, there's a profit to be had on the bond fund.

Interest rates may get cut and that will affect my monthly payout. Overall though, with the increasing bond price and monthly payouts, I'll do better than most socks and MFFs.

I understand it is all market timing but if the market declines, should the bond fund do better? I'm an newbie when it comes to investing in bond funds and using this scenario will help me understand them better.

Yes this is market timing, and market timing has a bad track record.

With bonds/bond funds, even if the stock market crashes, what will happen is a big question mark. There is a lot of belief that when stocks crash bonds do well, but it is more complicated than that, and to the extent to which stocks and bonds going in opposite directions has historical validity, current circumstances are different. And short term flight to bonds (which we have been seeing) may only be short term.

If you do want to play market timing with stocks and bonds, the bond fund you want to be in is long term treasury fund, not intermediate. Of course, this is also more dangerous if you gues wrong. Long bonds have most to gain if interest rates fall, even if yields on intermediate bonds change more than on long bonds (which happened when stocks crashed in 2000-2002). Long Treasuries should be the preferred flight to safety over long AAA corporates, because risk premiums, even on AAA corprotes, tend to increase during recessions (and most AAAs now are financials, which are having problems).

Wall Street expects the Fed to cut rates and to ignore inflation. However, oil futures are at a record high and the dollar is down, both of which are inflationary. Also, the impact of the Fed on intermediate and long bonds is unclear, other than day trading.

And, don't forget, both stocks and bonds are now heavily dependent on foreign investment, and a weak dollar doesn't help.
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