“How much lower can rates go?”
“Anyone willing to lend the U.S. government money at 30 years for (fill in the blank) % is crazy!”
I see variations of these comments, and get these kinds of questions, all the time. Frankly, I don’t blame you for sending them my way. I’ve been following the interest-rate markets closely since the mid-1990s, and I’ve never seen anything like today’s all-time low yields.
I’m sure many of you also remember taking out mortgages at double-digit rates back in the early 1980s. If someone told you back then that three decades later, the same loan would only cost you 3%-and-change, you’d probably tell them they needed to get their heads examined!
|Remember paying double-digit mortgage rates in the 1980s?|
But rather than think like an American home buyer, or a traditional interest rate analyst, put yourself in the shoes of an investment manager who needs to put tens of billions of dollars in capital to work in bonds. Where are you going to go? What are you going to invest in?
A German 10-year that “yields” negative-0.12%?
A Japanese 10-year that “yields” negative-0.27%?
A Swiss 10-year that “yields” negative-0.65%?
British 10-year yields have plunged to an all-time low of 0.84%, while French yields are barely positive at 0.17%. A few years ago, Italy was on the brink of a massive debt default. But now, its 10s yield a paltry 1.21%.
You might figure junk bonds are attractive at around 5.2% for higher-grade securities, and 15.1% for bottom-of-the-barrel ones. But then you’re taking on a ton of credit risk at a time when defaults are surging and economic growth is dropping. Emerging-market bonds also carry significant credit risk, not to mention potential currency-related headaches.
|“Fundamentally sound dividend-paying stocks are a great alternative for people like you and me.”|
Highly rated, less economically sensitive, fundamentally sound dividend-paying stocks are a great alternative for people like you and me. In fact, I’ve been recommending several of them in my Safe Money Report. Almost to a name, they’re surging to multi-year or all-time highs, while spinning off market-beating yields.
(Editor’s Note: Click here if you want to get your hands on specific names and “Buy” and “Sell” targets).
But many investment managers are restricted by their mandate. They’re forced to stick to bonds only. So that basically leaves high-grade corporate and sovereign bonds as the best choices among several bad options.
Bottom line: It’s all RELATIVE when it comes to bonds. Yields on U.S. Treasuries may stink. But they stink less compared to the alternatives. So money is pouring into our bond market. All you can do until this yield chase ends is go along for the ride in bonds and count your profits, which is exactly what I’m doing in my services.
As for side effects of the bond surge, look no further than the precious metals market. Silver just exploded to its highest level in almost two years, while gold is having its best start to any year since 1980.
There are several reasons behind the gains. But the simplest and most powerful is that gold is now seen as a “yield play” by many investors. That’s because its 0% “payout” beats the negative yields offered by many benchmark government bonds.
The implication for stocks is mixed. As I mentioned, the “Safe Yielders” I’ve been banging the drum on for many, many months are exploding higher. But no-yield, higher-risk stocks are going nowhere. Financials are particularly vulnerable to ongoing rate declines, particularly at the long end of the yield curve, because that crushes profit margins on core lending and investing activities.
Bottom line: I continue to preach a cautious investing stance, with long positions in high-grade fixed income, gold, and Safe Yielders, as well as an elevated allocation to cash. That has worked well for a year now, and it should continue to do so.
Until next time,
Welcome to Jupiter! NASA has received a signal from more than 500 million miles away, confirming that its Juno spacecraft has started orbiting Jupiter, the largest planet in the solar system. The message was: “Welcome to Jupiter!” – setting off cheers and hugs among the NASA team.
The Juno craft was launched five years ago on a mission to study Jupiter’s composition and evolution. It follows the Galileo craft, which made it to Jupiter in 2003. That craft eventually was deliberately crashed into the planet to end its voyage. Jupiter is an enormous ball of gas 11 times wider than Earth and 300 times more massive. Researchers think it was the first planet to form and that it holds clues to how the solar system evolved, CNN reports.
Good luck! The Mega Millions jackpot for tonight has reached nearly $450 million, making it one of the top 10 largest prizes in U.S. lottery history. The last winning Mega Millions ticket was sold in March for a $157 million jackpot. The record is $1.59 billion, from a Powerball jackpot sold in March. The largest Mega Millions prize was $656 million in March 2012.
Need help? More police and other emergency-services departments are studying the use of 911 texting, allowing people in need another method to contact authorities when voice calls are too dangerous to make. U.S. Senator Charles Schumer, a Democrat of New York, has been pushing for text-to-911 in New York City. He said such a system can “save lives by informing 911 dispatchers of critical details that can guide first responders.”
Some cities already allow text-to-911 communication, including for deaf and hard-of-hearing people. Emergency officials stress that a voice 911 call is generally preferred when possible because a dispatcher can elicit details more quickly than texting back and forth. The major concern, officials say, is that overuse of texting when not absolutely necessary could slow response times and cost lives.
Brexit? Interest rates? Stock caution? Should we be spending money to fly to Jupiter? Should you spend money on a lottery ticket? Comment on these and other issues below.
The Money and Markets team
P.S. I’m deeply concerned about the explosion of mass shootings and terrorism we’re seeing in places like Columbine, San Bernardino and Orlando. I absolutely refuse to stand by quietly while these kinds of tragedies continue to happen. That’s why I created FREEDOM FROM FEAR with Sheriff John Bunnell of America’s Wildest Police Videos. And it’s why it’s so critical that you view it the minute it’s released Tuesday, July 12. Click here now to register! — Jeff Cantor