It's one of the most baffling triumvirates in the history of investing. Yet stocks, U.S. treasuries and gold are rambling down the same road.

When diversification failed asset allocators in the credit collapse circa Sept - Nov 2008, U.S treasury bonds soared. Investors liquidated gold, corporate bonds, stocks, commodities... and they piled into U.S. treasuries for safety. In other words, stocks and gold traveled in the same direction, but all 3 (i.e., stocks, gold and treasuries) did not journey along the same path.

Jump ahead to March of 2009.

At the start of this cyclical bull, stocks and gold rallied higher over the ensuing three months. Investors dumped their U.S. Treasury bond holdings with the iShares 20+ U.S. Treasury Bond Fund (TLT) losing -10% in a 3-month span. Again, 2 of 3 moved in the same general direction, while all 3 did not.

Over the last 3 months, however, something strange has occurred. The direction of all 3 asset classes - asset classes that typically show no resemblance to one another over time - have been moving in tandem.

3 Asset Classes, 3 Strange Months in 2009 (6/11-9/10)

 
      

3-Month %

       

U.S. Stocks (S&P 500 SPDR Trust SPY)

  

11.1%

U.S. Treasury Bonds (iShares 20+ Treasury TLT) 

 

8.2%

Gold (SPDR Gold Trust GLD)

   

4.3%

One explanation that has some plausibility is the idea that sidelined cash is working its way back into every aspect of the market... from the least risky to the most risky. It is possible that portfolios are being rebuilt from the ground up. Still, I'm not sure that I can sign on to that explanation wholeheartedly.

People are buying stocks because they are afraid to miss out on recovering more of the money that they have lost. And gold is being added to hedge against U.S. dollar devaluation as well as inflation. In fact, stocks may also be purchased as a hedge against inflation.

However, other than the U.S. Federal Reserve, who is buying 30-year treasuries for a 4.2% yield? Not Japan. Not China. The primary buyers would be those who expect a stampede for a safe haven... because 4.2% is a low payoff for the hold-n-hope risk involved.

So again, which of these 3 asset classes is about to decouple from an exceptionally improbable threesome? My best estimate here is that the bond market will go its own way.

Specifically, if investors continue piling into treasuries, stock investors will be spooked by a perceived shift to safe haven purchasing. Treasury bond gains would eventually come at the expense of U.S. stocks and may even increase the uncertainty of the hold gold thinkers.

Conversely, if investors begin a slow process of bidding farewell to U.S. treasuries, the stock market would prosper from dip buying and an appetite for risk. Long bonds (20+) shouldn't significantly hamper stock progress until and unless the 30-year hits a 5.5% yield.

What if the stock market feels too risky to you? And what if you are thoroughly disenchanted with the low yields of U.S. treasuries? Is there a still a way to get a reasonable income stream with relatively low risk?

Enter national muni bond ETFs. A quick perusal of 8 of the top national tax-free ETF offerings shows that the tax-free income stream continues to be solid. Equally compelling, the capital appreciation on these muni bond ETFs have been sensational.

Tax-Free Income ETFs in 2009

    
  

Annual Yield

YTD

     

VRDO Tax-Free Weekly (PVI)

 

2.5%

 

-0.2%

SPDR Capital Short Term Muni Bond (SHM)

2.5%

 

3.0%

Market Vectors Short Muni Index (SMB)

3.2%

 

1.5%

S&P National Municipal Bond Fund (MUB)

3.7%

 

3.9%

SPDR Capital Muni Bond (TFI) 

 

4.1%

 

5.9%

Market Vectors Intermediate Muni Bond (ITM)

 

4.4%

 

6.7%

Market Vectors Long Muni (MLN)

 

4.8%

 

16.7%

Powershares Insured National Muni (PZA)

 

5.1%

 

11.5%

Long-term muni debt has been particularly attractive. For instance, Powershares Insured National Muni (PZA) tracks an insured long-term muni index comprised of AAA-rated, insured, tax exempt, long-term debt.

Considering the fact that PZA provides a reliable monthly income stream as well as diversification across the country's highest rated/insured muni debt, a taxable equivalent yield for folks in the 28% bracket of better than 7% is hard to knock. If you're willing to remove the insurance and loosen up the credit quality to AA, Market Vectors Long Muni (MLN) may garner a bit more capital appreciation with a taxable equivalent yield for the 28% bracket of roughly 6.6%.

If you'd like to learn more about ETF investing... then tune into In the Money With Gary Gordon. You can listen to the show live or via podcast or on your iPod.

Disclosure Statement: ETF Expert is a web log (blog) that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.  

You can view Gary's daily market commentary at www.ETFexpert.com. Gary Gordon garygordon@mypacificpark.com