Bond Market Timing Revisited by Jay Kaeppel
Here's an update of this author's article from August 1994 on trading bond funds using Barron's Gold Mining Index as an indicator. In addition, take a look at a new version of that model, as well as information on other ways to take advantage of the timing signals it generates.
An article I wrote that appeared in the August 1994 STOCKS & COMMODITIES focused on bond fund investing and detailed a simple bond market timing
model that signaled when to switch between long-term bond funds and short-term bond funds. This article will update the results of that timing model, present a new version that appears to enhance results as well as impart information on other ways to take advantage of the timing signals it generates.
Bond prices rise and fall inversely to interest rate movements, and long-term bonds experience greater price volatility than short-term bond funds. Ideally, when interest rates are falling, a trader or investor will be in long-term bonds to maximize price appreciation, and when interest rates are rising, in short-term bonds or even money market funds to maximize capital preservation and to reinvest more quickly. I have found that changes in inflationary expectations identify points in time when the odds significantly favor a rise or decline in interest rates during the next 12 months.