The Strategy for a Bull Market in Bonds

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Over the past decade, historically low bond yields have converted many bond investors into bond traders. Bond traders strategically buy and sell bonds to generate price gains. A bond’s coupon, a primary reason to many investors buy bonds, is nothing more than a bonus for traders.

Trading bonds is ages old and was dominated by institutional investors. Recently, the historically low yield environment and the liquidity and ease of trading ETFs made bond trading more commonplace among retail investors.

With the 10-year U.S. Treasury note yield eclipsing 2%, some bond traders think we are approaching another peak in yields. I know 2% seems low, but bond yields have trended lower for the last 30 years. Each local peak in yield was followed by lower peaks, as shown below.

With poor demographics, weak productivity growth, and a slew of new pandemic-related debt on the federal books, I agree that another lower peak is probable.

For those interested in trading bonds, I present a road less traveled. Closed-end bond mutual funds (CEFs) have a unique structure that can produce larger price gains or losses than bonds and higher yields than traditional bond funds or ETFs. If yields will decline soon, some fixed income CEFs will produce double-digit returns in a relatively short period.