Corporate Bond ETFs Over Treasury

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (The FRED Report) -- Here at the FRED Report, we have had some really good forecasts the past two years, and a few that have been correct but not in a timely manner. One market that has been challenging for us this year is Treasury bonds, but things may finally be starting to go our way.

Our forecast has been for TLT to peak (and at lower levels, 100 - 105), and for LQD to outperform. We have held to this view through the market turbulence in the summer, and our reasoning has been that as fear comes out of the markets, Treasuries would fall (and rates rise).

Corporate bonds have looked much better to us as an investment, and we note that the performance of LQD has started to kick in. You can see that LQD is starting what could be a significant breakout to the upside.

 

Our latest recommendation is to switch HYG to PHB. We show daily charts of these, and note that PHB is much more stable, although HYG is more liquid in terms of daily volume. Both came neatly off of the bottom in early October. As you can see from the charts, HYG has been more volatile, but PHB is performing a bit better on a relative basis. This switch should dampen volatility in bond portfolios. In addition, as fear leaves the markets -- these high yield markets should trade more like bonds and less like stocks. Such an environment should benefit PHB as well.

To conclude, we continue to believe that stocks and commodities will outperform bonds into the end of 2011, and quite possibly beyond. Rates may rise a bit as fear leaves the marketplace, and we see the economy is still growing, albeit slightly. We feel that corporate bonds are positioned to outperform in such an environment, so would be transitioning out of TLT into LQD.

Fred Meissner is founder and publisher of The Fred Report. Fred is a CMT and past President of the Market Technicians Association (MTA). He recently left Merrill Lynch's Market Analysis Department and Sector Strategy Department to form The Fred Report. A detailed bio is here:Fred Meissner.