Bonds and the Era of Deflation: A Safe Alternative to Stocks?

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Bonds and the Era of Deflation: A Safe Alternative to Stocks?
Special Report: A just-published 10-page urgent warning to bond investors

By Bob Stokes
Thu, 07 Jun 2012 17:45:00 ET

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Of the two Mellon brothers, Richard was the more gregarious. Andrew was reserved. In the early twentieth-century, each man's temperament proved useful in increasing their banking fortune.

Even so, Andrew was obviously the financial savant. He was quoted saying "Gentlemen prefer bonds" -- a remark he probably made before the Great Depression (you'll see why in a moment). He was U.S. Treasury Secretary (1921-1932) during the onset of the deflationary crash and depression.

A just-published (June 6) Elliott Wave Theorist and Financial Forecast Special Report says

In the Great Depression, interest rates on lower-grade bonds trended lower until 1930, and those on high-grade bonds continued lower until 1931. Then they soared, on fears of default. [The chart below], published in Conquer the Crash, shows what happened. (The chart shows rates inverted to reflect bond prices.)

The Special Report goes on to say

During the Great Depression, bond prices finally bottomed, and interest rates peaked, in June 1932 [see chart above]; stocks bottomed in July...

So we see how bond investors fared during a deflationary period -- poorly.

Fast forward to today: the bull market in bonds has been going on for decades. The most recent bond investing craze merely heaped more icing on the cake. In fact, the interest rate on the Treasury's 10-year note has just fallen to the lowest level in U.S. history. As you know, when bond yields fall, bond prices rise.

Will bond investors continue to be rewarded?

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Tags: debt, deflation, economic depression, Elliott wave, Interest Rates, junk bonds, market forecasts, municipal bonds, risk management, safe haven, Treasury bills (T-bills), Treasury bonds, treasury yields, U.S. Treasuries

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