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Published: September 21, 2009
In December 2005, Citigroup announced a new
10-year, $100 million bond issue...
At any time, Citigroup has hundreds of different bond issues
trading in the markets. Right now, for example, my Bloomberg
terminal shows over 500 different Citigroup bonds. There was
nothing special about this 2005 issue...
The housing market was rising, Wall Street's mortgage machine
was in full swing, and America was enjoying the peak of its
prosperity. At the time, you and I were paying 6% to borrow
money secured against our houses. Citigroup would pay 5.3% to
borrow money, unsecured.
For two years, these bonds traded in a narrow band between $95
and $105. Then in March 2008, Bear Stearns failed and prices
started to erode...
Citi's bonds broke $90 in July, when Fannie Mae and Freddie Mac
failed. They broke $80 in September, when Lehman failed. And by
March 2009, when it seemed Citigroup itself might fail, they had
fallen to $62...
Here's the thing: In the last six
months, the credit markets have made
a remarkable recovery. This
bombed-out Citigroup bond issue now
trades for $99 again. In other
words, investors are pricing these
bonds as if the credit crisis never
happened. Amazing.
This chart of the investment-grade
bond fund iShares Investment Grade
Corporate Bond Fund (NYSE: LQD) is
even more amazing. It shows prices
of top-quality corporate bonds have
surged and are now back to 2006
levels...
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Most people don't know this, but the bond market is far more
important to America's economy than the stock market. For one
thing, the bond market is over five times as large as the stock
market. For another thing, institutions dominate the bond
market. They may not be the shrewdest investors in the world,
but they are sophisticated, they trade billions, and they trade
with less emotion. The stock market is a roadside casino in
comparison, reflecting the hopes and dreams of a million
gamblers.
I don't recommend you buy LQD or corporate bonds in general.
They're expensive now. Besides, government support is the only
reason the bond market is soaring and Citigroup's bonds are
trading back at par. If the government withdraws this support
for some reason, the bond market could collapse again.
Instead, use the bond market as an indicator. Russell Napier, a
well-known stock market historian, studied market tops and
bottoms during the past 100 years and showed corporate bonds tend
to lead the stock market by several months at important turning
points.
Today, the trend is clearly up. So for now, stock market
investors have nothing to worry about. But keep an eye on LQD.
It should give us advance warning of the next trend change in
the stock market.
Good investing,
-- Tom Dyson
Contributing Editor
Daily
Wealth |
