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Time To Buy Treasury Bond ETFs Again?

From Bill Hall: Yes, I admit it. As a moneymaking professional investor, I am currently obsessed with the yield on the benchmark 10-year U.S. Treasury.

I watch it like a hawk. And if you’re a frequent reader of my Money and Markets columns, you know that I’ve written about it multiple times so far this year and that I have been right on target with my interest-rate predictions as well.

Read on and I’ll explain why I am infatuated with this one single financial market indicator and why you should be, too, if you are serious about protecting and growing your money!

As a 30-year Wall Street veteran, one of my guiding principles was passed on to me early in my career by the legendary investor John Bogle, founder of The Vanguard Group.

John introduced me to Occam’s razor, which is a problem-solving heuristic with philosophical underpinnings.

If you’re like me, when John first told me about it, I didn’t know what a razor, in the philosophical context, was … but since it was the great John Bogle who was sharing it with me, I figured that I had better find out.

And when I went looking, I was surprised that Occam’s razor is simply a commonsense “rule of thumb” used by philosophers to shave away unlikely explanations so they can solve problems faster.

OK, by now, I’m sure that you are probably saying to yourself, “Thanks for this interesting tidbit of information, Bill, but what does Occam’s razor have to do with me, my money and the yield on the 10-year U.S. Treasury?”

Well, Occam’s razor — which has been attributed to the 14th century theologian and Franciscan Friar William of Ockham (yes, his name is spelled differently than his discovery) — says that: The simpler the solution the more likely it is to be correct.

And when you are working on Wall Street — which has a long history of creating schemes cloaked in complexity primarily for the purpose of separating unwitting investors from their money — getting down to the simple essence of things can be difficult. But if you can do it consistently, it can give you a distinct advantage over everyone else.

So in a nutshell, what John was telling me was that in the financial markets searching for the simplest solution provides a powerful edge.

Now, here’s the good news for you:

In the current environment, there is one market metric that will tell you which way the stock market is going to go. Best of all, it’s easy to understand, accurate and complete.

This one market statistic should be the cornerstone of your investment research. That’s because this top-of-the-food-chain market yield can tell you more at a glance than reading multiple financial publications, sifting through countless articles on the Internet or spending hours watching financial programming on television.

And that one market statistic is … the yield on the 10-year the U.S. Treasury!

And here’s what it’s telling you now?

It’s saying that the stock market and interest rates across the board are headed down. That’s because, despite two recent interest-rate hikes by the Janet Yellen-led Fed at the short-end of the yield curve, the 10-year Treasury yield hit a three-week low earlier this week causing stocks to suffer their worst drop in five months.

What’s more, the lower-longer trend for interest rates is firmly in place. Here’s my proof.

Click image for larger view

This chart shows that the extra yield on U.S. bonds compared with other developed countries’ bonds is at, or approaching, record highs, especially when comparing the 10-year U.S. Treasury to similar instruments issued by the governments of Germany and the U.K.

As an example, the current yield on the 10-year German Bund is .4%. Yes, .4%. That’s a whopping 2% lower than in the U.S where the 10-year currently stands at about 2.4%. This big difference in yields says that interest rates in the U.S. are going to decline, which means stock prices are going down, too. So you better get ready because we might even get that long overdue market correction of 20% to 30% that we haven’t seen since the Financial Crisis of 2009.

What should investors do?

Currently, I recommend buying the iShares Barclays 20+ Year Treasury Bond ETF (TLT). If interest rates and the stock market fall as I expect, investors will collect a handsome profit. And better yet, TLT carries an SEC yield of about 2.9% as reported by the mutual fund rating service Morningstar. This means even if the anticipated market downdraft doesn’t happen for another few weeks or months, you’ll get paid while you wait for an eventual decline to occur.

What’s more, the core of your portfolio should be in a carefully selected group of dividend-paying blue chip stocks that can grow through thick and thin and provide an ample cash-on-cash return. As the editor of the Safe Money Report, I’ve recommended a group to my subscribers that I call the Dependable Dozen.

You should also keep some powder dry to load up on gold using the SPDR Gold Trust ETF (GLD). Safe Money Report subscribers will get my signal about when the time is right to buy GLD as well as the appropriate allocation percentage based on market conditions.

The iShares Barclays 20+ Year Treasury Bond ETF (NASDAQ:TLT) was unchanged in premarket trading Friday. Year-to-date, TLT has gained 1.11%, versus a 4.70% rise in the benchmark S&P 500 index during the same period.

TLT currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #18 of 27 ETFs in the Government Bonds ETFs category.

This article is brought to you courtesy of Money And Markets.

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