Bonding not ideal strategy

Published in the Geelong Advertiser, July 2009 by Dale Gillham

The Australian Stock Exchange has announced a proposal allowing retail investors direct access to the bond market in the same way investors buy and sell shares on the exchange.

Access to debt funding through the issue of bonds has traditionally been sourced through wholesale markets, but due to a lack of liquidity in this market it is now being proposed that both state and federal governments have the opportunity to source cash from ordinary Australians by way of trading bonds on the stock exchange.

For retirees looking for risk-free income, bonds are a great investment vehicle provided they can lock in a higher long term interest rate than the cash rate which is debatable right now given the effect on the economy resulting from the sub-prime meltdown.

In my opinion, investors looking to generate wealth or increase their retirement savings while interest rates remain low would be better off in other investment vehicles.

From an economic perspective, it would be prudent to consider the effect on the shares and property market if large sums of money are ploughed into the bond market.

While it is early days, I hope that that the Government and ASIC don't make a rash decision simply to solve a short-term problem.

So what can we expect in the market?

This week the market has been quite volatile although it closed higher in five of the last seven trading days. This contrasts the Dow which closed higher on three of those days, indicating that market sentiment here is more bullish and resilient than the US market.

In previous reports I indicated that the down move in the All Ordinaries Index could occur between June 18 and early July, therefore the volatility we have experienced this week could just be a last burst of selling pressure before the next run up occurs.

I still believe prices will rise for the next three to five weeks to reach the yearly high I have been expecting.

Therefore we should see the market settle over the next week and move up strongly once again to my target of between 4200 and 4600 by late July.

As always we need to be prepared in case the market decides it is now moving down into the yearly low that I expect will occur sometime between September and November.

Therefore I encourage all investors to use stop losses and avoid any leveraging unless you are a really experienced trader.

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