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The Bond Buyer’s Secret: Turning 2% Yield Into 7% Return


The list of people proclaiming "the death of the bond market rally" is long and strewn with bodies. Sure, we've had a few head fakes along the way, but for the most part, a 30-year rally in bonds/slump in yields is still in tact, with rates wallowing near historic lows.

While most investors concede that rates ultimately have to rise, Jim Bianco, president of Bianco Research says that time isn't here yet.

"Never get bearish on something where somebody with a printing press has promised to buy $85 billion a month," he says in the attached video, a thinly veiled reference to the quantitative easing action being taken by Federal Reserve chairman Ben Bernanke. By his math, savvy traders who buy 10-year notes when they yield rises above 1.9% would be able to pocket 2 to 3 times as much in gains once (and if) that yield comes back down to 1.5%; which he expects it will.

"It's not great but definitely not bad," he says of the hypothetical 6-7% return, predicting that the upcoming debt ceiling debate in Congress at the end of February will be nasty and the ensuing turmoil will likely send investors fleeing for the safety and certainty of the Treasury market.

"The least probable scenario is that they're going to shake hands, sing Kumbaya, and we have a deal and it's done forever," this Chicago-based analyst, technician and strategist says. "Until we get past the debt ceiling issue it will be supportive of the bond market."

And others, such as Nuveen Asset Management's Bob Doll, support a similar strategy, and are seizing on the likelihood that this debt ceiling fight will be as tumultuous as the one that preceded the country's credit rating cut in 2011.

Of course, not all investors see value in the low-yielding government debt, including Warren Buffett who has famously called "Treasuries one of the most dangerous asset classes" due to their inability to offset inflation and thus, maintain future buying power. It's a stance that Bianco is happy to rebut.

"There's only one problem though, his stock has been suffering like the S&P 500. The 10-year Treasury has outperformed Berkshire Hathaway's (BRK) stock for the last 14 years," Bianco fires back. "If you had just put money in Treasuries it has been a winner for you."