No. of Recommendations: 4
The recent price action for Desarrolladora Homex’s 7.5’s of ’15 offers a lesson about bond investing. So let’s take a look.
A bond’s yield moves inversely to its price, right? So the two charts are mathematically equivalent, and they should be psychologically equivalent to a viewer. You can buy when the price is low, or you can buy when the yield is high, and your results will be the same. But falling prices are scary, right? We humans think to ourselves, ”Well, if no one else wants it, why should I step in and buy?” But that’s exactly when the buying needs to be done, and I’m happy to report that I caught a piece of that action. Not as much as I maybe should have, but some, and I now have some quick cap-gains I could cash out, or I could sit tight on the bond and enjoy my 30% YTM.

Let’s look at another pair of charts, and this time, a triple-AAA issuer.
That second chart is ugly, right? There’s just no way to have made a sound decision investment from it. But the first chart is intriguing. Despite the elevated price levels, money could have been made from buying last April around 120 and then selling out as prices tagged 130. Or, again, money could have been made by buying late Jan of this year as prices fell below 120 and then getting out as they recover.

Whether you want to trade bonds, or buy ‘em and sit on them, there’s still money to be made in the bond market. It’s isn’t easy money. It isn’t safe money. But it’s money, and it’ll spend as well at the grocery store or gas pump as money made elsewhere in this crazy, stock and bond bubble we now find ourselves in, due to the Fed’s free money policies. But when the bubble ends, and it will, which presently over-bought asset would you rather be owning?

Obviously, the prudent answer is "None". But how realistic is that? The alternative, I'd suggest, is Chuck Price's answer. "When the music is playing, you've gotta get up and dance." But spend some time this weekend or next thinking about how you are going to protect present gains when prices do roll over. An economic and market crash is coming for the simple reason that no country, not even a country whose currency is the world's reserve currency, can continue to borrow $0.40 cents for every $1.00 dollar it spends and not expect that Bad Things Won't Happen. Spend some time planning how you're going to deal with that inevitability.

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