The U.S. bond market is losing steam

U.S. bonds fell last week as the weekly bond offerings to finance the deficit met with weak demand.

It seems that Japan and China have been absent or muted in their recent demand for U.S. bonds.

This could be a substantial problem since they are the two largest holders of U.S. debt. Some argue that Japan’s absence from the market is temporary, attributable to the fact that the Japanese fiscal year ends on March 31.

China on the other hand has been gradually changing the composure of their investments. They have, in recent months, been diversifying away from U.S. bonds in favor of a more balanced portfolio that contains a greater amount of non- U.S. holdings. Now that the Euro is lower, perhaps they will reinvest in bonds issued by the better quality European sovereign issuers, perhaps Germany. It has also been noted by us that China expects to run an $8 billion trade deficit for the month of March 2010.

Many world stocks are temporarily over bought, but buyers are continuing to target them. Why would buyers want to look at stocks after their rise in 2009?

Reason 1) To obtain a stronger currency.

European currencies are weak, and thus Europeans are seeking stronger currencies for investment. Asian currencies, the Australian, Canadian, and even the U.S. dollar have benefited mightily from this trend. They will buy stocks denominated in currencies other than the Euro.

Reason 2) To obtain rising dividends.

With bond markets looking queasy, why not buy stocks in fast growing countries whose dividends can follow the rise of corporate profits? Alternatively, one can buy shares of companies that benefit from the rise in the value of commodities.

It is common for investors to buy and hold gold, oil, and other commodity-related shares or shares of companies who can grow through difficult economic times. European, Japanese and various other economies will be under pressure for years from higher interest rates as a result of unwise monetary and fiscal policies. Why not take this opportunity to diversify?…and while diversifying, why not look for companies that can grow their dividends as inflation inexorably re-asserts itself in the coming months and years?

Reason 3) To buy stocks of the companies which can grow, because they enjoy the tailwinds of growth in their home country.

Reason 4) To avoid the risk of holding bonds now, while interest rates are rising around the world.

Individual investors are selling bonds and buying stocks. Investors will sell bonds and buy stocks, while waiting for yields to rise and bond prices to fall to more reasonable levels. Although this is not how institutional investors think, this thinking is common among individual investors. We believe that this is a very wise approach. In our opinion, long term bonds are a terrible investment at this time.

SUMMARY

Smart investors will buy stocks on dips, sell their long term bonds denominated in the Euro and the U.S. dollar, and shift into shorter maturity bonds or into stocks that can grow. Investors should consider selling all long term bonds of any type. We favor foreign stocks in Singapore, Thailand, Indonesia, and Malaysia. We also favor export-driven companies in developed countries, and commodity producers globally, especially oil companies that are increasing their production.

In the world of currencies, we suggest that readers continue to avoid the Euro, which will fall more than the U.S. Dollar. We expect the Australian, Swiss, Thai, Canadian, and Malaysian currencies to rise. Gold is in a trading range and we believe it is smart to buy below $1090 per ounce and hold for longer term.

Guild Investment Management, Inc., a registered investment advisor. All material presented herein is believed to be reliable. Investment recommendations and opinions expressed in these reports may change without prior notice. Read Guild Investment’s past periodic market and economic commentary articles by going to the Commentary Archive on their web site www.guildinvestment.com.