Bonds Could Now Be a Buy

All eyes will be on Fed Chairman Ben Bernanke on August 8 when we find out if the Fed will raise interest rates again, making it eighteen Fed rate increases in a row.

While the futures market is slightly tipped towards Bernanke going for another rate increase, many economists, including yours truly, wonder if the Fed will finally take a breather. Regardless, the Fed realizes the economy has cooled off substantially after the Federal Funds rate moved from a historic low of 1% in the summer of 2004 to 5.25% today. Consumers know it to.

According to a survey by The National Association of Home Builders, confidence among U.S. new home builders is at its lowest level in more than 14 years. The builders see first hand how sales of new homes are falling and how contracts are being cancelled either in their cooling off period or because of a lack of buyer financing.

The damage, my dear friend, has been done. The consumer is hurt… wounded you could say… all thanks to 17 interest rate increases in a row–the longest consecutive run in Fed interest rate hikes in 30 years. Who would have ever guessed the Fed would raise rates so aggressively? Not the poor fellow who bought a home with an adjustable rate or variable rate mortgage two years ago.

If the Fed does go ahead with another rate increase in the beginning of August, it will likely be the last Fed increase for some time to come (unless inflation gets radically out of hand). That’s why I’m thinking it could be a good time to buy bonds.

Bonds, of course, rise in price when interest rates fall as their return makes them more valuable. After a bear market in bonds that has lasted for months, courtesy of so many consecutive Fed interest rate increases, the action in the bond market, as I read it, indicates the bear market in bonds could be over.

I’ve always preferred quality when buying bonds, going with government bonds over corporate bonds. If you have some cash lying around in your portfolio that needs to be parked in secure investments, bonds could be a great deal.