A very important part of investing is recognizing when you’re wrong as quickly as possible to minimize losses. After watching Bernanke’s Q&A session yesterday after the close, I’m ready to admit I was wrong on interest rates. I’ve never seen someone stumble through questions like that before. It was almost hard to watch! It’s as if he knows that he’s stuck between a rock and hard place and has lost control of the bond market.
My mistake was thinking the Fed could actually control the market. It’s becoming clear now that US government bonds don’t hold the same flight-to-quality appeal that they have in the past. Barring a sovereign default by a major country like Japan or a European nation, I’m now on board that we’ve seen the low in rates. I didn’t buy-in after the Fed announcement on June 19th because I thought it was the usual market overreaction. But this isn’t about US economic statistics anymore. What’s happening overseas and the amount of capital coming into the US is beginning to change the trend. We’ll see the usual short-term ups and downs, but I think rising rates AND rising stock prices is now the longer-term trend. See here.
I’ve been working on eliminating US Treasuries from portfolios, shifting the positions to equivalent duration Investment Grade Corporate bonds for the time being and will adjust duration when appropriate.
-Nick