Most private investors breathe only stocks. Equities are all they want and what they study and know best. Until 50 years ago bonds were far more common as investments, so much so that most of the large Wall Street and retail brokerages were bond houses. Partly that was due to the fact that bonds did well during the Great Depression I in a continuation of the bond bull market from 1919/20 to 1946.
My paternal grandfather, Arthur Edwin Drake, was not a wealthy man. He was in middle to lower management in the New York Central Railroad. He bought as many railroad bonds as he could from the late 1920's into the early 30's, and put four children through college in the 1930's and 40's on those bonds and lived comfortably. Bonds then went south from the late 1940's to 1981.
It's instructive to see what bonds did in the 1929 crash and Great Depression I. The table is from Sidney Homer's "A History of Interest Rates". Look at the left-hand columns of the annual yield of long governments which fell from a high of 5.67% in 1920 to 2.17% in 1946. The yields were particularly volatile from 1929 to 1932. This is often attributed to the needs of banks to sell off Treasury's into ready reserves for depositor withdrawals in the panic. We have seen much the same thing in the past three years as first there was a panic INTO government bonds on a flight to safety, and then there was massive liquidation.
Just as in 1932-33 we may now be seeing a return to the bond bull market. Our current bond bull market has lasted 30 years, but who is to say it can't last another decade and drop to 2% as in 1946?
Looking at the T Bond futures chart from 2008 we see the massive liquidation last year and the rebound this year. I consider the 123 level on bonds to be key for historical reasons I've detailed here before. the rallies late last year came back to that level and fell away, but after much congestion at that level in May and June this year, bonds have broken out above the 50% retracement level of the decline from December 2008.
With FED rumors and whispers of extending the targeting of Treasury rates from very short term to beyond two years, it seems likely that further "encouragement" will be given to bond speculators to bid them up and the yields down. As I have discussed in comments under the past several posts, there are enormous potential boosts to bank and government fortunes if they can recapitalize by issuing bonds at 2-3%. Perhaps the only way to revive the economy is to make the banks and government as rich as they were before the Fall.
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