Bonds continue making investors money, but that’s pushing yields lower. Where should an investor needing cash-flow look?
Over the weekend, the number of reported cases of coronavirus leapt.
It’s now in 28 countries and governments around the world are scrambling to contain it. For example, Italy has canceled all public events in Venice and Milan. And South Korea has raised its disease alert to its highest level.
As I write Monday morning, markets are reeling. The Dow is down nearly 900 points, with investors flooding into the safe-haven assets of gold and bonds.
The rotation into bonds is driving prices up, which simultaneously lowers yields. In fact, the yield on the 30-year Treasury has now dropped to an all-time low. As I write, it’s trading at 1.828%. For some perspective, the 30-year was at 2.44% as recently as this past November.
Meanwhile, last week, the yield on the 10-year Treasury inverted with the 3-month T-bill, stoking fresh recession talk. And as I write, the 10-year yield has fallen to its lowest level since July 2016.
How should we interpret this?
It turns out, master income investor, Neil George commented on the environment in bonds in his update to Profitable Investing subscribers last week.
From Neil:
Now, as a bond guy from way back, an inverted curve is traditionally when the 10-year yield is lower than the two-year yield. That’s not what we have. Yes, the sub-one-year yields are higher, with the three-month running at 1.57% compared to the 10-year at 1.55%.
But there are reasons behind this. The Federal Reserve and its Open Market Committee (FOMC) are working to keep the short-term rates higher than needed, with the target range for Fed Funds at 1.50%-1.75%. Meanwhile, its bond buying is rapidly ramping up its portfolio assets that are now topping $4.18 trillion.
Federal Reserve Assets — Source: Federal Reserve & Bloomberg Finance, L.P.
The combination is very much a part of the short-end yields, with intermediate maturities dropping in yield and rising in price.
The other big forces are low inflation and rising demand by U.S. and global bond buyers, which I expect to continue.
Bond buyers are buying because the U.S. market is the best to own, which is why I’ve been recommending that you do so for the past two years. The COVID-19 mess will only help the bond market.
***Which bonds in particular does Neil like in this environment?
For that answer, let’s turn to Neil’s most recent issue of Profitable Investing.
Fortunately for Digest readers, Neil has allowed me to reveal one of his favorite bond funds today — the BlackRock Credit Allocation Income Trust (BTZ).
From Neil’s most recent issue:
The U.S. bond market is continuing where it left off in 2019 with further growth and income. The overall US Aggregate Bond Market Index by Bloomberg and Barclays has generated a total return for the trailing 12 months of 9.5%.
One of my favorite taxable bond investments remains the closed-end BlackRock Credit Allocation Income Trust (BTZ) …
Yielding 7%, BTZ remains quite attractive. To that end, it still trades at a discount to its net asset value (NAV) by nearly 5%. The discount continues to narrow, however, aided by efforts of BlackRock to buy back up to 10% of the outstanding shares at a price of 98% of the NAV.
Neil likes BTZ up to $14.85. As I write, it’s trading at $14.58, so you still have room to initiate a new position.
***How will coronavirus affect the Fed and its interest rate policy?
Income investors are watching the Fed closely for clues about interest rate decisions in 2020. High on the list of variables that could influence rates is the coronavirus.
Minutes released last week from the Fed’s Jan. 28-29 meeting revealed committee members held rates steady in part because the outlook for the economy had gotten “stronger” since the previous forecast in December. Furthermore, the minutes noted that “current stance of monetary policy was appropriate.” (This means a range between 1.5% and 1.75%.)
However, these minutes reflected discussions that took place prior to the latest spread of the coronavirus outbreak — and we may not have realized its full impact yet.
In fact, just two weeks after the January policy meeting, Federal Reserve Chairman Jerome Powell created space to revisit policy as he sat before the Senate Banking Committee. Specifically, he warned of risks to global supply chains from production shutdowns in China.
Powell noted, “We’ll begin to see it in economic data coming up fairly soon. It’s too uncertain to even speculate about what the level of that will be.”
But perhaps the clearer message about how the coronavirus might impact Fed policy came from the Philadelphia Fed President, Patrick Harker:
If the situation gets significantly worse, and we start to see significant impact on the U.S. economy, then we’d have to think about accommodation. But I don’t think we’re at that point right now. We just need to let this play out.
Bottom line is we can’t say that coronavirus will, in fact, lead to another rate cut in 2020 — but we can say it kills any serious talk of a rate hike.
Below is the CME Group’s FedWatch Tool. It places the odds of steady rates at the Fed’s March 18 meeting at about 78%, with a 23% chance of a cut to the 1.25% – 1.50% range.
By the way, I looked at these numbers on Friday before the latest news on the coronavirus. The odds of a cut in March then were only at 10%. In other words, expectations for a cut have literally doubled over the weekend.
If we push out to the end of 2020, specifically, the Fed’s December 16 meeting, we don’t see any suggestion of a rate hike — only potential cuts, as you can see below.
***Given this, the bottom line is that it remains a challenging environment for income investors needing cash-flow
Below is a chart showing average CD rates from 1984 through last year.
Though the X-axis isn’t labeled, all you have to do is look at the declining slope of the line to see the pain that income-investors have felt for years.
In short, whereas the average 1-year CD paid over 10% in 1984, Bankrate reports that as of the end of last month, the average 1-year CD pays just 0.76%.
Source: BankRate
But if you’re looking for safe, high-yielding investments, there’s hope …
Last fall, Neil released a book that tackles this issue head-on. It’s called Income for Life: 65 Income Streams ANYONE Can Collect.
The book includes 65 different income plays. There are investment ideas, as well as unique “side hustle” opportunities.
Here’s Neil on the investment opportunities in the book:
There are many securities which I outline that offer yields that are multiples greater than that of the S&P 500 and the general US bond market — all with minimal risk from proven companies’ stocks, bonds, preferred shares ETFs, closed-end funds, and other funds.
All of these are buy-and-own — with no need to trade anything or deal with options strategies. And yes, I have plenty of yields running from 7%, 8%, 9% and over 10% — all vetted and proven in their capability to deliver income for any individual investor.
But as just mentioned, the book also includes non-market-related income ideas. Back to Neil:
And it also provides numerous means to generate additional income outside the markets. There are countless ways to generate income beyond regular paychecks. And I present a wide variety of ideas and the steps needed to make them pay and pay well — all while doing many things that folks are interested in already.
To learn more about Income for Life: 65 Income Streams ANYONE Can Collect, click here.
Meanwhile, if Neil is right, expect more strength from bonds until we’ve gotten a handle on the coronavirus.
We’ll continue to keep you up to speed. Have a good evening,
Jeff Remsburg
