Why Bonds Are Almost Certain To See a New Bull Market

One of the guys in the office is just getting his start in the financial world. In fact, he just celebrated his 24th birthday. I told him, “I have clothes in my closet older than you.” He looked shocked.

I’m not a big shopper, but when I do buy something, it’s good quality and well constructed. It may temporarily go out of style, but styles come and go. And eventually it comes back in fashion.

Asset classes go through the same “fashionable” cycles.

In the December issue of my The Daily Paycheck advisory, I began to rebalance my portfolio so that it would be better positioned for 2011. One of the trends I discussed was the loose U.S. monetary policy. The Federal Reserve’s actions in the Treasury market will push people out of bonds and into riskier assets such as equities and commodities. During the past couple of weeks, we’ve seen the beginning of that trend.

Improving retail sales, stronger corporate earnings reports and the extension of income-tax rate cuts are also fueling a trend away from bonds. Investors are more optimistic about the economy and willing to take more risk for a potentially greater return.

But like I said, trends come and go.

In the near term, fixed-income securities won’t be viewed as the little darlings they once were during the financial crisis and ensuing recession. Even so, we can’t ignore what might be the largest influence on where Americans invest…


In 2011, the first group of 75 million baby boomers will hit 65 — retirement years. Initially weaned on aggressive growth stocks, this massive population bubble is going to develop a healthy appetite for income investments.

Think about it. Some estimates have this group controlling more than 80% of personal financial assets — that’s trillions of dollars. Much of that is tied up in housing and other non-liquid investments, but there are still loads of cash in traditional spots. According to the Investment Company Institute, there is $10.7 trillion in mutual funds alone.

As baby boomers wind down their working years, they’re going to do what retirees before them have done — shift from riskier stocks and commodities into more buttoned-down income investments. In fact, given the rocky market in the past decade and disappearing pensions, the shift could be larger than most people think.

So while we’re seeing a short-term move away from fixed-income assets, there’s an enormous long-term trend that has yet to be realized.

Action to take –> Baby boomers are starting to set an important trend as they start enjoying their investments. Follow that trend and keep investing in dividend payers, including bonds. You can even reinvest those dividends, despite the recent dip in many fixed-income securities. In fact, the trend is already starting to offer better income opportunities on my reinvested dividends and new positions. It’s a great way to bide my time until what I think is fashionable comes back in style… and I know it will.