The Case for Treasury Bonds
During the week of October 25th 1999 Jim Shepherd advised his clients and the subscribers to his Newsletter to sell all stocks and use their funds to purchase Treasury Bonds. Here's why:
During the last week of October 1999, his model issued a very strong sell signal.
That sell signal was an indication that the end of the Great Bull Market was approaching, and that the economy would become much weaker in the months and years ahead. Further the elements of this signal indicated that the economy would become much weaker in the months and years ahead.
Here is the basis for his recommendation to own Long-Term Treasury Bonds:
- His model was signaling that the economy would begin to weaken
meaning that long-term interest rates would come down.
- Falling long-term interest rates meant that Treasury Bonds would
increase in value.
- In October 1999 the yield on the U.S. 30-Year Treasury Bond was
6.47 %.
- The current yield on the U.S. 30-Year Treasury Bond has fallen to
around 4.87%.
- The decline in long-term interest rates has resulted in an increase for our original bond purchases of over 79% (as of February 2007).
Increase in value of U.S. 30-year Treasury Bonds Oct 1999 to Feb 2007
- There is the common misconception among many analysts and
investment advisors - only because long-term interest rates are at four decade lows- that they have bottomed.
- Jim believes that long-term interest rates must come down even
farther in order for an economic recovery to begin.
- Although the Federal Reserve has lowered short-term interest rates
17 times and has been pumping massive amounts of liquidity into the
economy, there is no evidence that their efforts have been effective. In fact it appears that this liquidity has been thrown into the black hole of debt servicing and has had no effect on economic recovery as is evidenced by the declines in Monetary Trends.
SUMMARY OF PERIOD LEADING UP TO 'SELL' OF LATE OCTOBER 1999
There is a perception among most of the public that one should be in equities at all times. 'Investing', however, by definition means to be in the correct asset class for the best AND safest return (ROI). The Shepherd model clearly identifies in advance the necessary asset positioning just as it did by taking advantage of the huge run up in equities in the late 90's and then locking in those profits by exiting stocks and using those funds to buy the next profitable asset class - US Government 30-Year Treasury Bonds.