Now that the "dreaded taper" has begun bonds are thought to be dead money...not quite.
We already had a big selloff last summer as investors prepared for the Federal Reserve to pullback on QE. Then, long-term bonds got hammered as everyone positioned themselves for what was thought to be a September taper.
But the taper didn't come, and politicians decided to hijack the markets yet again, shutting down the government and threatening not to raise the debt ceiling...again.
At that point, instead of moving into the stock market, a lot of money came back into short-term Treasury notes, since at the end of the day, holding short-term U.S. debt was better than trying to figure out how Congress was going to release its hostage, the U.S. economy.
Then to some surprise, Bernanke decided to announce the taper before he handed the reigns over to Janet Yellen. And following the Fed's decision to reduce its bond buying program by $10 billion a month, rates have not skyrocketed and bonds have steadied.
Perhaps that's because the Fed has left the door open to increase bond purchases again in the future.
However, there are still risks for investors looking towards bonds. But, in the midst of all the dangers facing the bond market, there is one bond sector that will survive the taper and most likely profit through it.
And considering the downslide this sector has had, it's no surprise its off most investors' radars, even today.
But there's no doubt that this is a great place to safely park your money, and it's a very shrewd investment in its own right.
You don't have to buy a single bond to take advantage of what I'm going to show you, which means you don't have to sink a lot of capital into this strategy. But before I show you how to play bonds in 2014 and beyond, let's go back to the 1980s for a minute, when all this payoff potential began to build...
For years, we've seen bond prices rise almost without interruption. In the process, yields have plummeted to historic lows.
Since the 1980s, the decline in yields has been especially steep, as you can see in this chart of the bellwether 10-year Treasury from the St. Louis Fed... lulling millions of investors into a false sense of security via ultra-low interest rates.
When rates finally started to rise last summer, investors yanked more than $20 billion from bond funds during the first three weeks of August.
That's following the nearly $70 billion they took out in June, and we could see more than $500 billion coming out of bond instruments in 2014.
Editor's Note: Recently, Senator Paul warned of Roman Empire-Like collapse for America. To see the video that proves the Fed's been hiding bankruptcy from the American people, click here.
At the same time, yields, which run in the opposite direction from prices, are rising. Since May 2 the 30-year has gone from 2.8% to 3.98%, while the 10-year Treasury yield has moved from 1.63% to as high as 3.04%. That's quite a move in a very short time.
What's more, both will be heading higher in the years to come.
Here's what to do for yourself...
After an extended bond-market bull run, bonds are entering an entropy stage, increasing activity and less cohesion on the short and long end. And that means the best way to play bonds for big gains is by shorting them. I think rates are going to rise no matter what the Fed does or doesn't do.
So if you're of the same thinking, here are a few moves worth making today:
Inverse Bond Funds: The ProShares Short 20+ Year Treasury (NYSE: TBF) is a great choice, as it will appreciate as rates rise and bond prices fall - probably for decades. Even if you're early to the trade, this one could be a home run. Momentum is building now that the taper has begun.
Another option is the ProShares UltraShort 20+ Year Treasury (NYSE: TBT). It's the perfect tool for aggressive investors seeking leveraged short exposure to the U.S. Treasury market. Whereas TBF moves opposite 100% of the 20+Year Treasury Bond index, TBT seeks to move 200% against the long-term bond index.
Just because rates are rising doesn't mean you should ditch bonds completely.
The world is dominated by bonds and will continue to be for years to come. That makes bonds necessary, not merely optional.
I advise to move into shorter term bonds with durations preferably between 3-7 years. And my favorite sector in bonds right now is the municipal sector.
After Detroit's bankruptcy investors wanted nothing to do with municipal bonds.
While I myself have said that Detroit is the largest canary we've ever seen in the proverbial coal mine, "munis" remain critically important when it comes to two key aspects of our success - finding deep value and generating income.
After Detroit, most munis got absolutely shellacked. As a result, most are trading way below anything even remotely resembling fair value. Munis are so low that they're beginning to resemble a Jim Rogers "money in the corner of the room trade."
That's what the legendary investor calls those trades where "everybody" knows something. He says it's only logical under the circumstances to take the other side of the trade. It's like, he says, watching somebody put money down in the corner of the room; if you're right you just go over and pick it up.
I think that's where munis are today. And, one of our favorite investments, Nuveen Quality Income Municipal Fund Inc. (NYSE:NQU) appears ripe for the picking. NQU recently traded 12.91% below net asset value while also offering up a compelling 6.32% yield.
The official line is that munis are dead on arrival. That's not being helped by Detroit, either.
I could build a nice, eloquent argument as to why that's not the case, but I think the far simpler thing to do is remind ourselves that everything from junk bonds to tech stocks has been in the same boat. Over time, those who sought compelling value when nobody else saw it were the ones banking millions if not billions.
Buy Nuveen Quality Income Municipal Fund Inc. (NYSE: NQU) at market and plan on adding to it in the months ahead.
Fears over a muni blowout are overrated. Just in case, put a 25% trailing stop in effect immediately to protect your capital and your gains as they build. Oh, and I almost forgot... the last time we owned NQU, subscribers who followed along enjoyed total returns of at least 29.85% to go along with its yield. I'm confident the returns will be much higher this time around.
Editor's Note: In a must-see speech, Senator Rand Paul revealed shocking proof of the Federal Reserve's secret bankruptcy. But the most frightening part of this video is what this could all lead to - a $100 trillion American meltdown. Click here to see the startling evidence...
