Why I’m THANKFUL for the Bond Market Sell Off

I don’t know about you, but I’m still stuffed from yesterday! I ate enough turkey to feed a small army, and that’s not even counting all the trimmings.

But frankly, I wouldn’t have it any other way. Thanksgiving is a great time to get together with family, watch some football, eat well, and celebrate all we have to be thankful for. And believe me, there’s a lot … including the latest bond market sell off.

Yes, you heard me. I’m glad bonds are finally falling in price.

Why? As Americans, we’ve been forced to accept miserable yields on all kinds of income-generating investments …

• Yields on 2-year government notes recently hit 0.34 percent, the lowest in U.S. history.
• Five-year TIPS were just sold at a yield of negative 0.55 percent. Borrowers actually paid the government to take their money on the assumption the value of the TIPS would rise along with inflation in the coming few years.
• Willing to lock your money up for longer in order to be fairly compensated? Ha! Uncle Sam was paying less than 3.5 percent on a 30-year bond a couple months ago. That’s far from adequate compensation for locking your money up for three decades.
• Municipal bonds? No solace there! The average yield on a 20-year general obligation bond recently slumped to 3.82 percent.
• Even high-yield, or junk, bonds saw their average yields slump to less than 8 percent. Yields on such bonds were well into double-digit territory a couple years ago.

Fed Officials Forcing Investors to
Take on More and More Risk

Bottom line: It’s been next to impossible to generate adequate income with bonds. You’ve had to take on more credit risk, more duration risk, more currency risk — more risk all around!

Income-seeking investors have had to accept more risk.

That’s precisely what the Federal Reserve wants you to do, by the way. The Fed wants to force investors to snap up all the riskier bonds and stocks they can get their hands on so it drives down corporate borrowing costs. They think that will help the economy recover and unemployment fall.

As I’ve pointed out repeatedly, though, all the Fed’s moves have done is drive up prices in the “asset economy.” They haven’t done much of anything for the “real economy.” Or in simple terms, the Fed has given Wall Street a big, fat Thanksgiving dinner to feast on … while only throwing a few scraps to Main Street.

Just look at the latest news on housing, one of the main focus areas of the Fed’s levitation efforts:

• The National Association of Home Builders Housing Market Index came in at 16 in November, down from 72 at its peak in June 2005.
• Construction spending was only $801.7 billion in September, down from $1.21 trillion in March 2006.
• Construction employment slumped to 5.63 million in October versus 7.73 million in August 2006.
• Housing starts were running at a seasonally adjusted annual rate of just 519,000 in October, compared with 2.27 million in January 2006.

In short, all of these indicators are flatlining or falling despite the biggest money-printing binge in world history. Plus unemployment is hovering just shy of 10 percent; and consumer and corporate spending isn’t ramping up.

But all kinds of bonds (and stocks) were levitating on a promise of easy Fed money.

Your Strategy as Yields Climb

All of this brings me back to the point I made earlier: We’re now getting a sell off, and it’s one I’m thankful for. That’s because bond rates move in the opposite direction of bond prices. Indeed, yields are shooting higher on mortgage bonds, corporate bonds, Treasury bonds, and municipal bonds.

With yields rising, you might consider dipping your toe into the bond market.

If you avoided those longer-term bonds on my recommendation, you didn’t suffer any losses from the price declines. Now, you’re in a good position to start locking in higher, more attractive rates of return.

I wouldn’t put all my money into bonds yet because I think rates will likely keep rising in the months ahead. But if the sell off intensifies, you may want to consider legging in gradually as yields climb, especially in the hardest-hit markets like municipals.

That’s what I plan to do … once I finish digesting all that turkey!

Until next time,

Mike

P.S. This week we gave an encore presentation of one of our favorite Money and Markets TV episodes. We looked at an asset class that anyone buying supplies for Thanksgiving dinner is very familiar with: Soft commodities. And despite a recent drop due to concerns about slowing demand from China, soft commodities are still in the midst of a major bull market.

If you missed last night’s episode of Money and Markets TV — or would like to see it again at your convenience — it’s now available at www.weissmoneynetwork.com.