With all of the latest from the Fed and its zero-interest rate policy, I’ve been hearing the B-word thrown around a lot more: Bubble. But while some pundits would have you believe that the bubble is in the stock market, I see a much more obvious threat in the bond market.
How could this be? After all, junk bond yields fell to an average of just 5.56% last week. Well I have good reason to believe that yields are going to rise, and fast.
Last week, the Commerce Department announced that February prices at both the consumer and the wholesale level rose 0.7%. Even excluding volatile food and energy prices, both core CPI and PPI climbed 0.2%. This means that we’ve seen about 2% core inflation in the past year—so the Fed is clearly struggling to keep inflation under its 2% threshold.
This is important, because as inflation heats up, bond yields invariably rise—and bond prices fall. I believe that this is going to cause the bond bubble to burst. And when that happens, I think we’ll see even more investors flee bonds and seek out high-dividend yield stocks.
So I stand by the idea that the low interest rate environment is actually keeping the stock market firm (thanks to the onslaught of dividend increases and stock buyback programs out there), but the same can’t be said for bonds. And now that Chairman Bernanke has confirmed that the monetary pump will be left on for the indefinite future, the stock market remains the most attractive option for yield seekers.
This means that you’ll want to continue to seek out premium stocks that combine income and security through hefty dividends and strong earnings potential. As always, a good way to start is by running your stocks through my Portfolio Grader tool; if you’re not familiar with this screening service, you can get started here.