The bloodbath in bonds is showing no signs of letting up.
==> Benchmark 10-year Treasury note yields have risen from 2.5 percent a few weeks ago to 2.83 percent this week, while the 30-year yield is less than 20 basis points away from the critical 4 percent mark.
==> The leading long-bond ETF — the iShares 20+ Year Treasury Bond ETF (TLT) — has dropped more than 12 percent in value this year, and is thisclose to setting a 28-month low.
==> Municipal bonds are getting hit by a double whammy of rising defaults (see Detroit, whose right to file for bankruptcy was just affirmed this week, and troubled Puerto Rico) and increasing interest-rate pressure. That’s handing losses of more than 3 percent to investors in the iShares National AMT-Free Muni Bond ETF (MUB).
In other words, my warnings to get the heck out of bonds starting more than a year ago have been 100 percent on target. Investors who heeded them had the opportunity to avoid the worst year for the bond market since 1999, and even make money from falling bond prices.
But if I’m right, 2014 could be even worse than 2013 for bond investors. I’ve given many big-picture reasons: debt and deficits, foreign dumping of bonds, and domestic selling of bond funds and ETFs. Another key reason that’s increasingly coming into focus is this: The economy is on the mend.
I know it may seem hard to accept. That’s because we’ve been lulled into submission by years of Federal Reserve monetary pumping (which paradoxically sends a message that the economy stinks), talk of how we’ll never escape a “new normal” of low growth and more.
|Latest figures show 215,000 private-sector jobs were created in November. A sure sign the economy is on the mend.|
But look at the data. Initial jobless claims are back to where they were in 2006-2007, before the Great Recession. Auto sales are running at the fastest pace in more than six years. Manufacturing activity just hit its highest level in almost three years, with the benchmark ISM index at levels consistent with the mid-2000s expansion (and other expansions going back as far as the 1980s).
The ADP report on Wednesday also showed the U.S. economy created 215,000 private-sector jobs in November. That was far above the 170,000 forecast by economists, and October’s number was revised upward by more than 50,000 as well.
The “official” Labor Department figures are out today, and there’s always some discrepancy between the two reports. But overall job growth has been running at an average monthly rate that we haven’t seen since 2005.
This does not mean our longer-term economic problems have all gone away. But as I have stressed, it does mean crisis-era interest rates and QE policy have absolutely, positively no justification whatsoever.
So if there is any surprise that could rock the bond market in 2014, it’s that the economy is even better than Wall Street expects. That would validate my forecast that the tapering of QE will happen earlier than expected, and so will short-term interest-rate hikes.
It’s not like the market isn’t giving you clues of this. Look at the dismal performance of long-term Treasuries, despite all the Fed’s happy talk about printing money to buy bonds. That’s no coincidence. It’s because bond traders are sniffing out what’s coming, and they don’t want to get slammed when Fed policymakers reverse course.
Or how about the dismal performance of interest rate-sensitive sectors like real estate investment trusts (REITs)? I singled them out as vulnerable some time ago, and they have done nothing but bleed value since May. In fact, the iShares U.S. Real Estate ETF (IYR) has plunged 18 percent in just seven months.
So, please, whatever you do, continue to avoid long-term bonds. Avoid sectors with heavy interest-rate exposure, like REITs, most utilities, home builders and financials with extreme leverage to mortgage lending.
At the same time, I believe you can safely invest in highly rated stocks and sectors that will benefit from a stronger economy and that have little interest-rate sensitivity. Some of the names I’ve highlighted in my Safe Money Report are doing well, and I urge you to give it a read by checking out the latest report issued just this week. All you have to do is click here to get on board.
Until next time,