Pull up a chart of the Vanguard Extended Duration Treasury ETF (EDV)Â on your favorite trading platform. Or just look here …
|
|
| Source: Bloomberg |
Doesn’t look pretty, does it? This ETF that owns long-term U.S. government bonds is getting routed – down to around $108 from a high of almost $142. That puts it almost all the way back to where it was trading this time last year.
Since yields move in the opposite direction of bond prices, we’ve seen the 30-year surge to around 3.2% from 2.2%. That’s one heck of a move – more than 45% in just a few months. Heck, we gained more than 11 basis points today alone.
What’s going on? Take your pick of factors. The U.S. economy continues to chug along, with ADP suggesting today that we created 237,000 jobs in June. That beat forecasts for 218,000, and was the strongest reading since December.
The Greek debt crisis is rattling sovereign-bond markets in Europe on one hand. On the other, the Puerto Rican debt crisis is raising questions about the safety of municipal bonds.
|
||||||||||||||
Several ETFs and mutual funds that own higher-risk PR bonds got rocked this week. They include the $1.6 billion Market Vectors High-Yield Municipal ETF (HYD) and the Rochester Virginia Municipal Fund (ORVAX), which despite its name does own a big chunk of the commonwealth’s obligations.
Finally, Federal Reserve officials are making noises about raising interest rates as soon as September. They remain concerned about what’s going on overseas, as well as the value of the U.S. dollar. But they’re definitely closer to a hike now than they’ve been at any point in the last several years – which means all those interest rate risks I’ve been warning about are coming home to roost!
Look, I’ve been flagging the risks of investing in long-term bonds for a long time. They may have risen in value for the better part of last year, but that move is over.
It’s also worth pointing out: Yields on 2-year, 5-year, and 10-year notes never undercut the record low levels set in 2012-13 on the more recent pullback. So just as I said it back then, I’ll repeat it again now: I don’t think we’ll ever see those yields again in my lifetime.
|
|
| The U.S. economy chugs along, with job creation leading the way. |
That means you need to lock in long-term financing now if you’re shopping for something like a 30-year mortgage. If you’re looking for a safer way to invest in the fixed-income market, stick with ETFs or mutual funds that have a maturity or duration of two or three years, max.
When it comes to stocks, “bond-like” REITs and utilities are most vulnerable to price declines caused by rising long-term interest rates. If you want to generate income, zero in on some of my favorite alternatives instead. They would include MLPs or highly rated, dividend-paying stocks in other sectors besides the vulnerable ones I just cited. In fact, I’ve dedicated my entire next Safe Money issue to the topic.
Do you have any other favorite income-generating ideas? What do you think of the rout in bonds … is it going to continue and if so, what do you believe is driving it? Have you been dodging the carnage by following my recommendations? I’d love to hear from you on these topics over at the website.
|
The burdens of borrowing money, the Iranian negotiations, and all things Greece were the subjects of conversation in the last 24 hours online.
Reader Gary offered these cautionary comments in light of what’s happening in Europe: “The way the U.S. prints money, we are not far behind. We’re in great need for financial stability. Maybe the next President will do better.”
Reader Steven shared this take as well: “It’s a truism that the cost of borrowing money adds to the amount to be repaid anywhere from 50% to 100% of the amount borrowed. Governments hope that their investment in the country will produce returns that will make the debt payment possible and feasible. However, this almost never happens.
“Sovereign defaults appear to be looming on the horizon. How will those who are holding the notes respond? How would you respond? You would want your money repaid with interest. But how would others respond to your demand for repayment when they realize that you the creditor are living off of the wealth they are working hard to generate?”
Meanwhile, on the topic of Iran, Reader Ted F. said: “Iran is well on the way to nuclear weapons. All they have to do is string Obama and Kerry along long enough for the Russian missiles to show up, which would make it much more difficult for a pre-emptive strike at Iran’s nuclear infrastructure. With Obama’s and Kerry’s track record, that won’t be at all difficult.”
And Reader Steve said: “The Iranian negotiations should be chucked because they should never have gone on this far (with so many concessions) to begin with. Even the Arab neighbors of Iran dislike our negotiation stance, which may allow them to become a nuclear threat in the region very soon.”
Thanks for the observations. We’re up against some pretty important deadlines – or in reality, PAST those deadlines – when it comes to Greece and Iran. That means way or the other, resolution is coming.
Depending on what happens, that may merit some additional “buys” and “sells” in the days and weeks ahead. So make sure you pay attention to the emails and recommendations you receive as a subscriber to my services.
|
As health-care costs, government regulation and minimum wage levels rise in many parts of the country, companies are trying to cut corners to stiff workers, according to the Wall Street Journal. They’re using limited liability company and franchise structures, as well as fudging the lines between independent contractor/employee relationships to avoid overtime pay, taxes and other costs. In response, the government is getting more aggressive in cracking down.
What are your thoughts about the job market here? Do you expect more mergers to help boost the value of your shares? Will you be watching soccer on Sunday night? Share your views over at the website when you can.
Until next time,
Mike LarsonÂ
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 14 comments }
JOBS?!? WHAT JOBS?! I have been out of work for over 3 years, have a college degree, a CPA, and good experience. Yes, i went to a startup after working in F100 companies, Yes the startup failed, yes i went to another startup which failed as well. I’m an accountant, i had nothing to do with product failure, am i destined to never work again because dimwitted HR people keep asking me ‘couldn’t you have done anything to stay employed?’ The arrogance of HR will nit end until we eliminate the function altogether!
TJ.If you cannot see the light at the end of the tunnel,stumble thru and turn he light on yourself,thats what my Dad taught me
the job market goes hand in hand with the declining middle class. How can we increase jobs in america when corporations continue to take them overseas, and, or, automation deprives the middle class of raising their standard of living?
american corporations do not care about america, they care about the bottom line. CEO’s would rather pay a fine for polluting when they get caught instead of solving the problem that would be more then the fine, and hopefully not getting caught. it all comes down to greed—worldwide greed. i think tom brokow was right. the last great generation is leaving us daily, not to be replaced. my father, who left us recently at 95 always said he just needed enough to pay the bills. God Bless him, for he has opened up my eyes to the world.
What do I think about jobs? If the government told the truth the economy would tank. They are creating a minimal amount of low paying, part time jobs. The actual unemployment rate is probably closer to 25% and our manufacturing sector will probably never come back. That with the new trade agreements should drive us into the ground.
DREUF looks interesting. A Canadian REIT with a good dividend.
If we sell our zero coupon bond now-5 years early,- won’t we take a big loss?
Several weeks ago you talked about the growing spread in lower quality bonds vs high quality, short term treasurys. Your thinking then was that this was a good sign of recovery. My response was the opposite…..my thought was that this was an indication of FEAR. I still believe it is FEAR. When investors see what is happening to these munis (like Puerto Rico finally calling a spade a spade and going broke) they are bailing fast and thus you are seeing these charts. So many of these entities are de facto broke but it is like the emperor has no clothes and the press ignores it. Kind of like our politicians ignoring our almost $19 Trillion in debt as King Obama keeps on wildly spending and borrowing more $ we aint got. And regarding Long term bonds….. no one wants LONGer TERM bonds…..too much uncertainty there with all of these big changes happening daily. It is a tough time for investors. Fear is growing. Look out below.
i HAVE BEEN SHORT THE 30 YR BOND FOR ABOUT 4 MONTHS NOW, THANKS FOR THE WARNING.
DEAR MIKE! CAN FIND MY MONEY OVER BARAK OBAMA LICENSIA? THANKS! GOD BLESS YOU! SERGEJ LEVCENKO
If you folks think that persistently rising interest rates are going to be the theme, you need to go back to the blackboard.
Yes, rates will rise a bit, mostly on the declining fiscal credibility of the U.S. And yes, rates will look higher, if you look at the 30-year bond. But the 30-year bond? Really?
Focus a little more on getting the truth and not on selling copy, and ….your copy will be different.
Shorting 30 year bonds is working, I believe this will be a big gainer by the end of the year!
Mike
All the analysts are saying bonds all types in trouble,but in particular euro bonds. All mention timing as key factor > What are you recommending now to make a return from the predicted bond crash.
John
My method for earning money somewhat long term – it involves rental properties. I am up in years yet fully functional and enjoy tinkering around homes. To someone willing to search good neighborhoods for homes that are not teardowns but homes that need paint, landscaping, and other minor commitments a gold mine of return can be found. What I do is not brain surgery but can easily return 15% per year with little risk to capital. It is not a free ride but if you provide a clean neat home in a good neighborhood rental will not be a problem. You will have to vet your renters and be willing to roll up your sleeves a little but it can be very rewarding. It takes a little capital to get started but that capital is better served in property than in a bank. Mortgage rates are low offering good returns long term.
What about I bonds and TIPS? Are they to be avoided? What if you already own I bonds? Where is the best place to hold cash?