A 35-year trend that helped push the Dow from 750 to almost 20,000 is coming to a screeching halt…
And that’s bad news for bondholders.
The trend is ultra-low interest rates. They’ve gone from record highs in 1982 to record lows in 2016. Over that period, the Dow shot up 2,500%.
Now, the trend is reversing…
Since the 2016 U.S. presidential election, rates have skyrocketed. The 10-Year Treasury yield went from 1.8% on November 4 to 2.5% today—a massive 33% increase.
Over the past eight years, yields had declined, forming a downtrend line. That line acted as resistance against rate increases.
As you can see in the chart below, yields began to break above the downtrend line in 2016…
Fallout from these rate hikes could cripple a large portion of the investment world.
Prepare for a “Safe-Haven Slaughter”
Bonds will get crushed if interest rates rise.
Bond prices are inversely correlated to their yields. So, when yields go up, prices go down (and vice versa).
For example, a 10-year Treasury issued on November 4 with a yield of 1.8% sold for $1,000.
Those bonds now yield 2.5%… and today trade for $938. That’s a 6.2% decrease in just over a month—on a supposedly “safe” Treasury security.
So what should you do? It depends on your goals.
If you plan to hold your bonds until maturity, short-term price fluctuations won’t matter. Just hold tight and collect your interest payments.
[Maturity is the date when the borrower of a fixed-income investment is required to repay the full amount of the outstanding principal, plus any applicable interest to the lender.]
For instance, holders of a 10-year Treasury issued on November 4 will collect $18 in annual interest payments per year for the next 10 years. That’s $180 over the 10-year duration of the bond. At the end of the duration, they’ll also receive the full $1,000 principal back.
However, if you don’t plan to hold your bonds until maturity, sell them now. If yields continue to rise, bond prices will plummet even lower.
The same holds true for bond mutual funds and bond exchange-traded funds (ETFs). If rates go up, you’ll see these securities drop in price as well.
What to Do Next?
Bond prices will eventually find a floor when yields get high enough… and that will make bonds look more attractive again. But in the meantime, prices could go down a lot further than you expect—and no one can predict when they’ll hit the floor.
If you still want to own some bonds during this period, make sure they’re “short duration.” That means they mature in five years or less.
Meanwhile, current Palm Beach Letter subscribers can look into our “outside-the-box“ ways to snag safe 5%-plus yields… all while buying securities at up to a 25% discount to their market price.
One recommendation is up over 13% since we recommended it and still yields a fat 12.9%. But you need to act fast… It’s hovering right above its buy-up-to price. PBL subscribers can read the issue right here.
Regards,
Nick Rokke, CFA
Analyst, The Palm Beach Daily
CHART WATCH
Bitcoin reached a new high in the new year…
The cryptocurrency broke the $1,000 mark and hit a three-year high on Monday. It traded at $1,021 per coin on Tuesday, according to CoinDesk. It hasn’t been that high since November 2013.
In fact, bitcoin outperformed all central bank-issued currencies with a 125% climb in 2016, according to Newsweek. And it’s up more than 140% since we added it to our portfolio in April 2016.
Bitcoin has been spurred by the War on Cash, especially capital controls in China and India… the world’s two most populous nations.
India eliminated its two biggest currency notes, plunging the country’s economy into turmoil. And China limited the amount of capital its citizens can take out of the country. Both government policies pushed people into cryptocurrencies like bitcoin.
Of course, regular followers of Palm Beach Letter editor Teeka Tiwari already knew bitcoin was on a tear. Just last week, Big T noted bitcoin was the best-performing asset of 2016. You can get his full rundown right here.
MARKET BRIEFS
War on Cash Roars Into 2017: India‘s banking system remains in chaos in 2017 as huge lines form at banks and ATMs run out of cash. Last year, the government withdrew 86% of India’s banknotes from circulation. The plan was designed to clamp down on tax evasion and corruption. Instead, there’s panic in the streets…
And now the BBC reports that India plans to make it a criminal offense to hold the old notes from April 2017 onwards. Regular PBRG readers should be familiar with this crisis… In November 2016, we predicted this exact scenario would play out.
Cryptocurrencies Gain Steam: Bitcoin isn’t the only cryptocurrency surging. Our Palm Beach Confidential basket of micro-cap cryptocurrencies is also riding the tailwind. One play is up almost 130% and another is up 94% in less than two months. Confidential editor Teeka Tiwari says the War on Cash was one of the biggest drivers behind cryptocurrencies in 2016. You can get his insight on why they’re some of the best alternative assets you can own in 2017 right here.
More in Store for NVIDIA: Readers who followed Big T into red-hot NVIDIA Corp. can expect even bigger news in 2017 from the chipmaker. The stock has shot up more than 225% since we recommended it in December 2015. However, FOX Business gives three reasons why there’s even more upside for one of 2016’s best performers: More big partnership announcements, widespread adoption of virtual reality, and another earnings beat. If you own NVIDIA, continue to hold… and enjoy the ride.
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