The upside may now be limited in bonds

Two weeks ago, in a post entitled, "Bonds: worth a shot in the near term?" I suggested that bond prices had fallen too far, too fast, and were due for a short-term technical bounce. As evidence, I cited oversold momentum readings, the nearness of long-term support levels, and heavy volume in the iShares Lehman 20+ Year Treasury Bond fund (AMEX: TLT), a proxy for the overall market.

Since then, prices have rebounded somewhat, with the exchange-traded fund rallying from $83.12 on June 14th to $84.30 at today's close. However, while I sense there could be a bit more upside in the near term, today's statement following the latest meeting of the Federal Open Market Committee, the policy-making arm of the Federal Reserve, gives cause for concern.

In essence, the FOMC signaled that policymakers still consider the threat of rising prices to be the central bank's primary focus, and suggested members see no "sustained" moderation in inflation pressures, according to reports. Those words triggered a round of selling in fixed-income markets, amid worries that liquidity might be constrained and short-term rates could be headed higher in future, contrary to expectations.

With my longer term view on bonds remaining decidedly negative, today's unhelpful Fed action, together with the fact that prices are no longer at oversold extremes, suggests that the upside is probably limited in the near term. Under the circumstances, it makes sense to shift to a more defensive stance.

Michael Panzner is a 25-year veteran of the global stock, bond, and currency markets and the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes and The New Laws of the Stock Market Jungle: An Insider's Guide to Successful Investing in a Changing World.