Look at the German debt market. The yield on the benchmark German 10-year bund sank to within two basis points (two-hundredths of a percentage point) of zero percent today. The yield on the Japanese 10-year note sank to a record-low negative-0.15%.
To find a positive yield on French or Danish debt, you now have to buy notes with a maturity of at least eight years. In Swiss bonds, you have to go all the way out to 25 years. The total value of debt yielding less than zero topped $10 trillion last month, and it is rising day in and day out.
Here in the U.S., we had two auctions of longer-term Treasuries this week. Wednesday’s sale of $20 billion in 10-year notes drew the strongest demand ever from “indirect bidders” (a proxy category representing foreign central banks and private buyers). Thursday’s sale of $12 billion in 30-year bonds drew a near-record level of foreign demand.
|Bond auctions this week set off a frenzy in search of yield, any yield.|
That strong demand … and the recent string of lousy economic data … have combined to push U.S. yields relentlessly lower. The yield on the 30-year fell to 2.44%, while the 10-year dropped to 1.64%, today. That has taken out every key technical level except for the panic spike/reversal low from February 11. If we break that, we could see the lowest 30-year yields since the beginning of 2015 … and the lowest 10-year yields since the end of 2012.
What does that mean for U.S. stocks? Well, just look at the Nasdaq Composite Index. It’s still stuck a couple hundred points below its highs from last summer despite the recent rally. The Dow Jones Transportation Average? It’s 1,400 points below its December 2014 peak. The Financial Select Sector SPDR Fund (XLF) is also lagging.
But the Utilities Select Sector SPDR Fund (XLU) just hit an all-time high yesterday. Ditto for the Consumer Staples Select Sector SPDR Fund (XLP). One of my favorite “Safe Yielders” from the Safe Money Report model portfolio in the telecommunications sector also just broke out to an eight-year high.
Why the bifurcation? Simple. It’s all about the market-beating yields, lower volatility and economic resilience that companies in the utilities, staples, and telecom space offer … but that many techs and financials don’t.
|“It’s all about the market-beating yields.”|
These trends shouldn’t come as any surprise to you, and you should already have the playbook for how to profit as a result. I’ve been banging the drum for “Safe Yield” stocks for months on end, for instance.
In bonds, I’ve been riding this Treasury rally for all it’s worth in my active trading service All Weather Trader. I fully recognize that the madness has to end at some point. Even legendary bond fund manager Bill Gross warned yesterday that negative rates are a “supernova that will explode one day.”
But with recession risk rising … “Quantitative Failure” risk surging … the mainstream media still warning more about bond risk than stock risk … and bond prices now yet making a “blow off top,” I haven’t jumped off the train yet. I’ll need to see central banks change course, the economic data turn decisively for the better, or prices get completely nutty before doing so.
Lastly, I want to make one thing abundantly clear: None of this is healthy for the markets or the economy in the long term. The world’s central banks have gone completely off the rails with policy, launching untested, high-risk programs that are artificially distorting virtually every market on the planet.
Their past monetary experiments and lack of foresight helped inflate massive bubbles in dot-coms, housing, and mortgages. This time around, they’ve created an out-of-control “Everything Bubble.”
I have absolutely, positively zero doubt this will end in tears. But you have my personal guarantee, I will also absolutely, positively do everything in my power to protect your wealth as this sorry process unfolds.
Now, the floor is yours. Am I on track with my comments on bonds? Stocks? The long-term future of our markets? Or do you have a different opinion? How are you making money in this market, and what adjustments (if any) are you making in light of the madness in bonds? Share your thoughts in the comment section when you have a minute.
My colleagues and I have offered several takes on the markets and the economy in the past few days; here is a roundup of what you had to say in response.
Reader Sammi referenced the European Central Bank’s latest bond-buying plans by saying: “It’s the only thing they (the ECB) knows to do … and it’s really not much different than our FOMC’s great reluctance to increase rates.
“This would lead one to believe that ALL the central bankers of the world have the feeling they (we) are hanging on to the edge, about to fall. Since their ability to see beyond the end of their nose is much better than ours, maybe we should take heed.”
Reader Chuck B. added: “My understanding of the ECB bond binge is that, while the European banks are supposed to buy highly rated bonds, they are including funds that contain some percentage of junk also. So the central banks will be exposed to the collapse of junk companies, just like individual investors. That can’t be good.”
Reader Gordon brought up corporate book-cooking and what it means for stocks, saying: “I just read one analyst’s story that the figures are so fudged by GAAP earnings or whatever, that she feels she should go back to school to understand all the trickery and lies that barely border on legal. There are rumblings that the SEC will be sending out warning letters to companies using these deceptive practices.”
Reader Mike added: “People go to jail for manipulating balance sheets of a corporation. But look at the central bankers. They have no defense. How are they going to unwind their distortions without consequences? The people of these countries will be the ones who pay the price. Savers have been killed the last eight years.”
Finally, Reader Thomas offered this warning about what’s to come: “The banks are now even bigger to fail than in 2008, and the stock market bubble is firmly in place for the next round of wealth transfer when it tanks. Buckle up for the coming ride. It is going to be more than just bumpy.”
Thanks for weighing in everyone. I believe central bankers are rapidly losing control (or the illusion of control) in the markets. Every new program they come up with has vast, unforeseen consequences … forcing them to come up with new programs. But those programs carry even more consequences, raising the risk of a death spiral.
Not exactly a confidence-inspiring scenario, is it? So I hope you’re following the safe investing prescriptions I lay out in my Safe Money Report to protect and build your wealth in this environment.
Line is a Japanese company that wants to challenge the messaging service WhatsApp for dominance here in the U.S. So it’s going to take the fight to the service owned by Facebook (FB) by dual listing its shares in New York and Tokyo. Line hopes to raise $1.1 billion in its Initial Public Offering, currently scheduled for mid-July.
Hillary Clinton garnered the endorsement of President Obama yesterday following a meeting between Obama and Bernie Sanders. The Clinton campaign hopes Obama can sway independent and younger voters to her side. Elizabeth Warren also threw her support behind the Democratic nominee.
The weather phenomenon known as El Nino is gone, and likely to be replaced by La Nina. So why does that matter?
El Nino is marked by warmer-than-normal sea surface temperatures in the central and eastern Pacific; La Nina is the opposite, with cooler-than-normal temps. The 17-month-long El Nino helped spur rain across California and suppress Atlantic hurricane activity. La Nina could result in more storms forming and threatening the U.S. during the hurricane season, which began on June 1.
What do you think about the news we could finally see another significant technology-sector IPO? How about Clinton’s latest endorsements? Will they impact your voting plans? What thoughts do you have about the hurricane season, and its potential impact on insurers, energy producers, and more? Let me know in the comments section.
Until next time,