|Dow||-2.51 to 17,764.04|
|S&P 500||+0.87 to 2,080.15|
|Nasdaq||-7.76 to 5,013.87|
|10-YR Yield||+0.036 to 2.417%|
|Gold||+$2.40 to $1,176|
|Crude Oil||+$1.79 to $59.93|
Interest rates are taking flight … at a time when the risk of investor losses is at its highest ever.
The yield on the 10-year Treasury note hit 2.45% earlier today, its highest since October. The yield on the 30-year Treasury bond rose again, to 3.18%. That means it has gained almost a full percentage point from its January low.
Bonds, bond funds and ETFs are bleeding as a result. Long-term funds have lost more than 15% of their value in just a few months, while municipal bonds are suffering their worst quarterly losses since Detroit tumbled toward bankruptcy back in early 2013.
|Investors are throwing the dice when it comes to interest rates.|
But as bad as those declines sound, they could get much worse. Here’s why: As you know, central banks the world over have been buying trillions of dollars in long-term bonds. They’ve also been pegging short-term rates at 0% (or even in negative territory).
IMG Investors are throwing the dice when it comes to interest rates.
That has encouraged investors to take on more “duration risk” than at any time in history, as this Bloomberg story noted this week.
Duration is a measure of potential losses from interest-rate moves. If your bond fund has a duration of 10, it means you stand to lose roughly 10% of your money for every 1 percentage point move higher in long-term rates.
Given the increased volatility in interest rates, and the huge amount of risk that bond fund managers the world over have taken on, it should be no surprise that we’re seeing more and more “Bloody Wednesday”-style moves. That’s exactly what I’ve been predicting, and I urge you to take steps to prepare yourself.
(Editor’s note: You can find Mike’s protective strategies and details on specific investments you can make by clicking here.)
In the meantime, keep an eye on the 2.5-2.6% level on the benchmark 10-year note. That’s the next major level of resistance on the charts. If we take it out, we could see longer-term yields rally back to their late-2013 highs near 3% – when we were swept up in first, Fed-fueled “taper tantrum.”
|“It should be no surprise that we’re seeing more and more ‘Bloody Wednesday’-style moves.”|
So what do you think? Is this the start of a major move higher for rates? Will the risk that reckless Wall Street fund managers have taken on come back to bite them, and in a very bad way? Or is this just a flash in the pan move that won’t last?
Share your thoughts at the Money and Markets website when you get a minute.
|Our Readers Speak|
Meanwhile, I hope you enjoyed my colleague Mike Burnick’s take on the Federal Reserve and interest rates yesterday. My wife and I were in Chicago for a long weekend with family, but it’s nice to be back in the saddle again now.
Reader Frebon responded to Mike’s column with this analysis on the Fed and what it might do next: “The Fed is only data dependent and the data is faulty. They do not possess any common sense, however.
“It is their low interest rate policy which is stifling the economy by taking money out of the middle class — who will actually spend it and create demand — and putting it in the hands of banks and corporations, who are only looking to their bottom lines and are either fortifying their capital ratios, buying back stock or investing overseas.”
Reader Chuck B. also took issue with potentially faulty data, saying: “The government figures make it look as if employment is improving – and maybe it is. But according to other figures, at least a third of the working age population is unemployed. That doesn’t include those who are underemployed, or working several part-time jobs to make ends meet somehow, but who count as employed according to ‘official’ figures.”
Meanwhile, Reader Jake noted a key trend we’ve seen over and over again in interest rate cycles – the Fed follows the markets, not the other way around. His view:
“If the longer-term, free market rates rise, the Fed will follow suit. Rates on those as well as foreign bonds are moving up, so they are talking that story. I really don’t think the Feds actually control rates in any large way. Few have wanted to borrow money, so it has been on sale.”
Finally, Reader Glenn pointed to the ongoing divergence between stock market performance and economic performance recently. His take: “You equate the health of the economy with the health of the stock market. They are not only not the same thing, but for a great many Americans, they have not much at all to do with each other, by their experience. Picky I know. But I think you know better.”
Thanks for all your insights. I believe the sum total of the data out there indicates the Fed should have already raised rates. But they keep hesitating out of fear about the side effects of doing so. I don’t believe that game can go on much longer, however. That’s because the markets are already taking the lead and driving rates higher – as Reader Jake noted.
Agree? Disagree? Want to weigh in on other topics of the day? Then don’t hesitate to hit up the website here.
|Other Developments of the Day|
The country is eagerly awaiting a Supreme Court decision on the legality of federal insurance subsidies in select U.S. states. It should come sometime later this month, and may result in more than six million people losing health insurance coverage. In the meantime, President Obama is going on the offensive – delivering another speech that highlights the benefits of the Obamacare program.
The garage sale at General Electric (GE) is continuing, with the diversified conglomerate agreeing to sell a private-equity lending business to the Canada Pension Plan Investment Board for around $12 billion. The unit provides loans used to finance takeovers and business operations.
Elsewhere in the financial industry, global bank HSBC (HSBC) is exiting several businesses and emerging market operations as part of a major restructuring. The British bank will eliminate 50,000 jobs, and re-invest some of the savings in areas it wants to emphasize, such as Asia.
Apple (AAPL) unveiled several new entertainment- and software-focused updates, apps, and services at its latest Worldwide Developer Conference yesterday. They will enable things like picture-in-picture viewing/multitasking on iPads and reward customers who use its Apple Pay system, among other things.
Share your comments over at the website when you have some time.
Until next time,