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Barron’s Conway: Bonds Showing Signs of Bubbling

Wednesday, 19 Sep 2012 02:13 PM

By Forrest Jones and Steve Cordasco

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While bond prices have risen to the point they might be showing signs of bubbling, investors should consider dividend-paying stocks as a source of income, they should expect some volatility, said Barron’s columnist and blogger Brendan Conway.

Bond prices have risen in recent years, although the rally might be due for a cooling, especially with interest rates at rock-bottom levels and set to stay there likely for another three years.

Meanwhile, the Federal Reserve has announced that it will buy $40 billion in mortgage-backed securities held by banks a month, a monetary policy tool known as quantitative easing.

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The Fed added it would continue its program of selling its short-term Treasury holdings in the market and buying longer-term instruments simultaneously, with the aim of further pushing down interest rates across the economy.

These efforts combined will inject a total of $85 billion a month into the financial system, with the $40 billion from quantitative easing being freshly printed money, all aiming to spur investing and hiring — with a weaker dollar and higher stock prices serving as side effects.

With interest rates low and yields on bonds not even keeping pace with inflation, investors should look elsewhere for income, dividend stocks especially.

“You cannot get your stable stream of income as easily from the bond market anymore. People are driven into these stocks paying 3 to 4 percent. Those stocks obviously in the short run have a very different risk profile, they are liable to be more volatile,” Conway told Newsmax.TV in an exclusive interview.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

“The thing that I would point out is that it’s not like the bond market is that safe anymore. The prices of bonds have gone up and up and up so much as those yields have fallen,” Conway added.

Yields move inversely with the price of a bond, meaning the more the bond is in demand, the higher its price will rise and the lower the yield will be.

“I actually would argue there is an even bigger bubble in the bond market and you can trace a lot of this back to [lower interest] rates,” said Conway.

Those who do invest in stocks should hold onto them despite volatility that will come amid such heightened economy uncertainty.

The one way for people to not get burned is to not panic when they see those dividend stocks being volatile.

“You’ve got to stick with them,” he noted.

This week’s announcement marks the third time the Fed has rolled out such an unorthodox policy tool since the 2008 financial crisis, with the first round of quantitative easing seeing the Fed snap up $1.7 trillion in mortgage securities and the second round seeing the Fed buy $600 billion in Treasury securities held by banks.

The third round will run on an open-ended basis, meaning the Fed will intervene until it feels the economy is making marked improvements, especially in the labor market.

“This, I think, is the most important, it’s open-ended,” said Conway.

“They basically said this week that we’ll keep buying until the economy improves. Certainly that’s a factor that has to have people taking pause. You don’t fight the Fed as a trader, but by the same token, the Fed is certainly fighting the market.”

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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