Bonds offer hedge against stock collapse

The Ticker

November 15, 1996|By Julius Westheimer

WITH the Dow Jones industrial average blasting above 6,300 yesterday, to 64.6 percent above its Jan. 1, 1995, level -- but bond yields at eight-month lows -- should you buy bonds now?

Despite their high prices and low yields, bonds remain a great hedge for your financial portfolio in the event of a stock market meltdown, or sharp correction, from this extraordinarily high level.

The BCA Interest Rate Forecast is positive: "Bond market risk has fallen in the past couple of months. The sell-off we projected has been scaled back by weaker demand growth in the U.S. and setbacks in European and Japanese economic recoveries."

And a strong consensus has developed that the next interest rate move will be to lower levels. Opinions that bond yields will drop from the current 6.5 percent levels to 6 percent far outnumber those predicting 7.25 percent.

Dan Ascani, "the Global Market Strategist," writes: "With recession due in late 1997 and 1998, with disinflation-deflation // due, interest rates will decline and bond prices will rise."

Bond investors also are cheered by Wall Street comments that the election raised prospects for a balanced budget.

Many people wonder which way interest rates will travel now. "Interest rates should see one more upswing during the next two to four months, before a meaningful decline begins," says the Maverick Investor.

The letter explains, "With crude oil prices up 40 percent from 1995, inflationary pressures are building. And over the last 25 years, whenever crude oil rose by that degree, a 90 percent correlation existed with climbing long-term interest rates. Investors should use any bond price decline as a buying opportunity."

But, because interest rates are hard to predict, investors should protect themselves from wide swings by "staggering" or "laddering" their bond and CD maturities -- some short, some medium, some long.

And, if you are considering tax-free municipal bonds -- suitable if you are in the 28 percent-or-over tax bracket -- beware that the tax-free status of some municipals may be in jeopardy because of the "alternative minimum tax."

The AMT was developed to ensure that affluent people don't avoid all taxes through deductions, loopholes and exemptions, such as interest on tax-free bonds.

More and more people are now subject to the tax, and the number affected by the AMT is expected to rise to over 6 million within 10 years, from about 600,000 now.

BOND BITS: "Closed-end bond funds that invest in tax-free bonds look like super bargains. Some are trading at big discounts to their net asset value." (Lynch Municipal Bond Advisory.)

Pub Date: 11/15/96

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